Central banking forum says rates may have to rise further

Central banks around the world may need to raise interest rates further to ensure that inflation remains under control, the Bank for International Settlements warned yesterday.

The Federal Reserve and the European Central Bank have been raising rates for some time but there is growing concern in financial markets that the threat of inflation has not yet been curbed as the booming world economy raises the price of oil and other commodities.

Releasing its annual report, the Basle-based organisation of central banks said it shared those worries as well as rising unease over imbalances in the world economy stemming from the large US current account deficit and China's growing trade surplus.

Malcolm Knight, BIS's general manager, said: "To achieve and to continue to achieve low and stable inflation, central banks do need to bring real interest rates back into positive territory.

"That already has been done in some countries, notably the United States. But the decision on what pace to do that at and how far to go will depend very much on the incoming data."

The Fed, for example, has raised rates from 1% two years ago to 5% now and it is widely expected to up them for the 17th time this week, to 5.25%. The ECB has increased borrowing costs three times since December, to 2.75%, much less than the Fed, given the far slower economic growth in the 12-nation eurozone than in the US. Inflation has remained stubbornly above the ECB's 2% ceiling, however.

Mr Knight said the BIS was concerned that inflation expectations among individuals in some countries were a "little less well-anchored" than a few months ago. "That may have implications for the policy actions that need to be taken to make sure that this process of relatively strong growth and low inflation is sustained," he added.

The BIS noted that the expert consensus was for another year of strong global growth in 2006 with low inflation. But it pointed to some risks, including large budget deficits in many countries, low savings and investment levels in some, and the current account imbalances, especially between China and the US.

Mr Knight said market turbulence over the past six weeks was probably a healthy reassessment of risk by investors.