Fed chief says US rates will go up

The US Federal Reserve is still planning to raise interest rates gradually but is fully prepared to tighten policy more aggressively if necessary, Alan Greenspan said yesterday.

In remarks that boosted the dollar, the Fed chairman told a conference in London by telelink that the world's most powerful central bank would soon begin taking back some of the rate cuts that took them to a 46-year low of 1%.

"The [Fed's open market] committee is of the view ... that monetary policy accommodation can be removed at a pace that is likely to be measured. Should that judgment prove to be misplaced, however, the FOMC is prepared to do what is required to fulfil our obligations to achieve the maintenance of price stability."

The dollar gained ground against the yen and euro to trade at $1.226 to the euro and 109.6 yen.

The Fed has held rates at 1% for a year but is widely expected to raise them at its next meeting at the end of this month. Mr Greenspan said the US recovery looked "surprisingly balanced" and that the central bank had no reason to believe it could not raise rates gradually. He welcomed the 10% fall in oil prices since their peak above $42 a barrel last week but said he had no idea whether the drop was the start of a trend. In the event US light crude dropped 3.6% yesterday to $37.28 and Brent crude fell 91 cents to $35.05.

European Central Bank chief Jean-Claude Trichet said recovery in the eurozone was well established but gave no of a rate rise, saying risks to inflation were evenly balanced on both sides. The onus was on politicians to push through much-needed economic reforms to boost growth in the bloc. The ECB has held rates at 2% for the past year.

Bank of Japan deputy governor Toshiro Muto said the upturn in the world's second-largest economy was now entrenched but the BoJ would hold rates at close to zero while prices were still falling, a situation he expected to continue beyond this year.