BIS expects global interest rates to rise amidst inflationary concerns

Interest Rates Will Rise in `Golden Age' of Growth, BIS Says
By Gabi Thesing

June 25 (Bloomberg) -- Central banks will need to continue raising interest rates to quell inflation as the ``golden age'' of global economic expansion continues, the Bank for International Settlements said.

``Inflationary pressures might turn out to be more significant than anticipated,'' BIS General Manager Malcolm Knight told a press conference in Basel, Switzerland, yesterday. ``Authorities should continue gradually to normalize the level of policy interest rates'' as the global economy extends what ``may well go down in history as a `golden age.'''

The world's major central banks have raised borrowing costs over the past year to contain inflation, marking the first synchronized tightening of monetary policy since 2000. Policy makers are concerned that the longest streak of sustained global growth in 30 years will fuel wage and price increases as companies operate at full capacity and unemployment drops.

``Economic growth has been much stronger than expected,'' said Thorsten Polleit, chief Germany economist at Barclays Capital in Frankfurt. ``That's stoking inflation, so central banks will have to keep raising interest rates.''

The European Central Bank, the Bank of Japan, the People's Bank of China and the Bank of England have all indicated that further rate increases may be in the pipeline this year, while economists at Merrill Lynch & Co. and Goldman Sachs Group Inc. now expect the U.S. Federal Reserve to leave rates at a six-year high rather than cut them.

China, Europe
Companies appear to be ``regaining pricing power'' while ``rapidly rising wages in countries such as China'' suggest ``the tailwinds of globalization may have abated, at least temporarily,'' Knight said.

Chinese central bank Governor Zhou Xiaochuan said on the weekend he can't rule out raising rates a third time this year to curb inflation and take the steam out of a surging stock market.

The ECB raised its benchmark rate to a six-year high of 4 percent this month and President Jean-Claude Trichet left the door open for another move.

``We have never said that the tightening cycle has ended,'' ECB council member Guy Quaden told reporters in Basel yesterday. ``Central banks have to closely monitor risks for inflation, which seem to be oriented upwards.''

Globally, ``inflation continues to be a concern,'' said Mexican central bank governor Guillermo Ortiz. ``The latest data and information certainly point to a stronger global economy.''

Bankers Meet
Trichet, Zhou, Bank of Japan Governor Toshihiko Fukui and U.S. Federal Reserve Vice Chairman Donald Kohn were among more than 100 central bankers attending the annual general meeting of the BIS in Basel over the weekend.

Known as the central banks' central bank, the BIS holds currency reserves on behalf of its members, produces research on everything from derivatives to inflation-targeting and provides policy makers with a forum for discussion.

The International Monetary Fund forecasts global economic expansion of 4.9 percent this year after 5.4 percent growth in 2006. That will mark five consecutive years of growth above 4 percent, the longest streak since the early 1970s.

``It is not clear whether inflationary pressures have been contained,'' the BIS said in its annual report, published yesterday. ``Economic slack has more or less been used up in the major advanced economies'' and ``vanishing slack might have increased inflationary risks.''
New Zealand, Sweden

Central banks may also have ignited inflation by keeping borrowing costs ``so low for so long,'' the BIS said. In the period under review, to May 2007, interest rates ``remained highly accommodative in the industrial countries'' after being raised only ``moderately.''
New Zealand unexpectedly increased its key interest rate to a record 8 percent earlier this month and Sweden's central bank last week raised borrowing costs for the eighth time in 18 months. It said further increases are in store.

``The next few years could continue to produce good global economic performance,'' BIS's Knight said. ``We are confident that central banks will strive to meet the challenges they face in pursuing price stability.''