Rising inflation puts pressure on banks to raise interest rates

CENTRAL banks around the world came under fresh pressure yesterday to hike interest rates after rising food and oil prices forced up inflation.

Annualised measures of the cost of living rose in the United States, the eurozone, China and India, with economists predicting interest rate rises to restore some calm.

Spot gold hit a record high of $1,481.14 an ounce - gold is often seen as a hedge against inflation and would likely benefit if those price pressures rise significantly.

News of the rises came at the end of a week in which the UK posted a surprise fall in its inflation rate, with the consumer prices index (CPI) measure falling from 4.4 per cent in February to 4 per cent last month.

Yesterday's flurry of data showed the US CPI rose to 2.7 per cent - its highest level since December 2009. The 0.5 per cent increase last month matched both the rise posted the previous month and analysts' expectations.

Inflation in the 17-country eurozone climbed higher than expected in March to 2.7 per cent year-on-year, varying from 1.2 per cent in Ireland to 5.1 per cent in Estonia. The initial estimate had been for a 2.6 per cent reading, compared with 2.4 per cent in February.

Rob Harbron, economist at the Centre for Economics and Business Research, said: "It is a curious situation that the European Central Bank increased its rates from 1 per cent to 1.25 per cent earlier in April, whilst the (US] Federal Open Market Committee continues to keep its interest rates on hold.

"This is despite a much weaker recovery in the eurozone and significant downside risks to growth, as many economies implement austerity measures to reduce government debt.

"With inflationary pressures building up, we expect growth in the US economy to be robust enough to accommodate a rate rise later this year - possibly in the third quarter."

Although the headline US CPI rate jumped, the underlying "core CPI" measure - which excludes energy and food costs - only edged up by 0.1 per cent to 1.2 per cent.

The US Federal Reserve's policy-setting committee meets on 26-27 April and debate is most likely to centre on the timing of the withdrawal of some of the massive stimulus it has lent to the economy. Fed officials would like to see core inflation move to 2 per cent to prevent a slide towards deflation.

David Wyss, chief economist at Standard & Poor's ratings services in New York, said: "The Fed is not going to see inflation as a threat so they have the freedom to keep interest rates low longer.

"But core inflation is creeping up from its lows six months ago, so the Fed is going to end its extraordinary measures."

In Asia, economists expect the central banks of both China and India to tighten monetary policy further in short order to dampen inflationary pressure.

CPI in China rose from 4.9 per cent year-on-year in February to 5.4 per cent in March, the fastest rate since July 2008.

The People's Bank of China, the country's central bank, has increased benchmark interest rates four times since October and has required the country's big lenders to freeze a record 20 per cent of their deposits.

Dong Tao, the chief China economist for Credit Suisse, expects tightening to resume in the second half of the year. He said: "China is by no means near the end of the current tightening cycle. Food inflation is transitory, but service inflation and wage inflation are structural."

That bodes ill for Western economies buying manufactured goods assembled in China. If imported inflation keeps climbing, central bankers will have to press down domestically-generated prices if they want to hit their overall inflation targets.

In India, the wholesale price index, the country's main inflation gauge, rose by just shy of 9 per cent in the year to March, up from 8.3 per cent in the 12 months to February.

INDIA 9%

CHINA 5.4%

UK 4.4%

UNITED STATES 2.7%

EUROZONE 2.7%