Central Bankers Get Warning Of New Inflation --- BIS Says Present Controls May Not Be Adequate; U.S. Faulted for Deficit
BASEL, Switzerland -- The Bank for International Settlements warned that the world's recent economic growth can't be sustained without risking new inflation, and hinted that further interest rate increases may be needed to contain the threat.</br></br>Speaking at the annual meeting of the Basel-based financial institution, BIS Chairman and President W.F. Duisenberg warned, "The signs of increased inflationary pressures are widespread and we do not yet know whether the present degree of monetary tightness will be enough to bring them under control." The BIS, which functions as a bank for central banks, also criticized the U.S. for failing to shrink its trade deficit, which it said may create havoc in financial markets.</br></br>Central bankers and BIS officials generally viewed inflation as mild by standards of the 1970s, but nonetheless insidious over time. "None of us believes in an inflation explosion, but a creeping thing," said Alexandre Lamfalussy, BIS general manager, in an interview. "Almost everywhere things are edging up."</br></br>Although leaders at recent international economic gatherings have also voiced concern over inflation, the central bankers gathered here seem to take a more sobering view. Senior officials from both the U.S. and Britain recently have suggested that inflation is under control. The U.S. has even warned against stringent anti-inflation policies that might suppress economic growth. In contrast, the BIS annual report, released here Monday, warned that "it's impossible to gauge the strength of the inflationary pressures that have been unleashed." The report went on to say that low inflation levels in recent years may reflect dropping oil and commodity prices, rather than "a more complete victory on the inflation front."</br></br>While the central bankers have the power to use tight monetary policies to attack inflation, they must rely on politicians to deal with most of the other threats seen in the global economic outlook. In an effort to jawbone for economic reforms, the BIS drew attention to the stubbornly high trade deficits in the U.S. and Britain, and the accompanying trade surpluses in Japan and West Germany. "As long as you have large current-account imbalances, which entail large capital flows, we are going to get instability," said Mr. Lamfalussy. "Secondly, these major imbalances create a danger of protectionist pressures building up in the deficit countries, and I regard that as courting disaster."