Global Central Banks Halt Rate Cuts on Inflation Risk

The world's central banks are halting interest rate cuts as inflation picks up from Indonesia to Canada.

The Bank of Canada today unexpectedly kept its benchmark rate unchanged after four straight reductions. Federal Reserve Chairman Ben S. Bernanke yesterday said he'll ``strongly resist'' any surge in inflation expectations, while European Central Bank President Jean-Claude Trichet reiterated he may raise rates as soon as next month.

``There's a very clear concerted change in tone from just about every central bank you can think of,'' said Kevin Gaynor, head of economics and rate strategy at Royal Bank of Scotland Plc in London. ``They're really very keen to anchor inflation expectations.''

Surging oil and food prices are driving inflation above central banks' comfort zones and are replacing the global credit squeeze as the primary concern of policy makers. With the International Monetary Fund forecasting the fastest global inflation in 13 years for 2008, global interest rates may have bottomed even as the outlook for growth remains weak.

Vietnam today raised its rate to the highest in Asia. Brazil, the Philippines and Indonesia also lifted borrowing costs this month. Chile's central bank will probably raise the benchmark lending rate tonight as policy makers seek to slow the fastest inflation since 1994, according to the median forecast of 24 economists in a Bloomberg survey.

Next to Move

``It's hard to think of cases where we had such a dramatic shift to the hawkish side,'' said Doug Porter, deputy chief economist at BMO Capital Markets in Toronto. ``You could feel the sands shifting away from growth to the downside, to inflation.''

Indonesia's central bank may raise its policy rate in July for a third consecutive month to slow inflation, Deputy Governor Hartadi Sarwono said yesterday. ``I cannot say whether it's going to be 25 basis points or more,'' Hartadi told reporters.

JPMorgan Chase & Co. economist David Hensley says his measure of global rates, based on the policies of 31 central banks, will go no lower than this month's 3.66 percent and will rise to 3.81 percent by the end of the year.

Policy makers will need to pay ``close attention'' to make sure the increase in commodity costs doesn't pass through to broader consumer prices, Bernanke said in a speech to a Boston Fed conference late yesterday. Central bankers ``will strongly resist an erosion of longer-term inflation expectations,'' he said in Chatham, Massachusetts.

Inflation Focus

Trichet said June 5 that inflation in the 15-nation euro region has accelerated ``significantly'' and Bank of England Governor Mervyn King said last month the price outlook has ``deteriorated markedly.''

Central bank policy makers in Sweden and Norway may be among the next to move. Inflation in Sweden accelerated to the fastest in more than five years in May, the country's statistics office said today. In Norway, price increases were close to a six-year high.

The renewed inflation focus stands in contrast to policy makers' priorities since credit markets seized up in August. The Fed has slashed its main rate seven times in the past nine months, taking it to 2 percent, as concerns about a U.S. recession and a potential collapse of financial markets encouraged it to put price risks aside.

The Bank of England and the Bank of Canada also reduced rates, while the ECB postponed a planned increase in September.

`Top Priority'

``Containing inflation appears to be a top priority right now,'' said Sebastien Lavoie, an economist at Laurentian Bank Securities in Montreal and a former Bank of Canada economist. ``The level of energy prices is at the point that businesses react by passing it on to the consumer.''

Canadian consumers are already seeing higher prices. Inflation unexpectedly accelerated for the first time in five months in April. Fuel costs surged 37 percent, and prices for bakery products rose 10 percent, the most since November 1981.

Crude oil for July delivery fell 1.9 percent to $131.84 a barrel in New York. The futures reached a record $139.12 a barrel on June 6 and have more than doubled in the past year.

Corn futures for July delivery rose 9 cents, or 1.4 percent, to $6.6625 a bushel at 12:43 p.m. on the Chicago Board of Trade. The most-active contract has surged 73 percent in the past year. Rice is up 85 percent from a year earlier, reaching a record $25.07 on April 24.

To be sure, increases to lending rates in Group of Eight industrialized countries may be measured.

``We need to proceed in a very deliberate manner and I expect us to do so,'' Dallas Fed President Richard Fisher said today in New York. He disagreed with the idea that ``we could move less than gradually if the forces of inflation were threatening.''

The Dallas Fed chief is the only member of the Federal Open Market Committee to dissent three times this year from decisions to lower the overnight bank-lending rate, favoring either no change or less aggressive reduction.