Monday, December 10, 2007

Central banks under pressure over inflation

From Reuters:

Another U.S. Federal Reserve interest rate cut this week is a foregone conclusion as far as financial markets are concerned, but a heaping helping of global inflation data may leave a sour aftertaste.

The Fed is widely expected to follow the central banks of Canada and England with a quarter-percentage-point reduction in the benchmark federal funds rate on Tuesday and some economists predict a more aggressive half-point cut to prevent a housing downturn and credit contraction from derailing the economy.

But nagging inflation, largely from steep energy and food prices, is forcing central bankers onto a narrow plank as they seek the right balance between promoting growth and keeping prices in check. Inflation hawks will likely be heard at least faintly in the closely watched statement announcing the Fed's decision.

Last week, the European Central Bank kept rates on hold but acknowledged that some members had considered a hike to tamp down rising prices. ECB President Jean-Claude Trichet said the euro zone central bank "stands ready to counter upside risks to price stability," which sent a signal to investors that rate cuts were unlikely any time soon.