Norges Bank Leaves Key Rate at Five-Year High of 5.5%

Norway's central bank left its benchmark interest rate unchanged as a slowdown in economic growth tempered policy makers' concern that inflation is set to accelerate.

Norges Bank held the deposit rate at 5.5 percent, according to a statement on the bank's Web site, after lifting it by 2 percentage points since the beginning of 2007. Unchanged rates were forecast by all 18 economist surveyed by Bloomberg.

The economy grew at its slowest pace in more than four years in the first quarter as interest rates at a five-year high and a mounting labor shortage crimped demand and production. The central bank has signaled it may lift its benchmark rate by another quarter point this year to prevent rising wages from pushing the inflation rate above the 2.5 percent target.

"Eventually the need to fight inflation will take the upper hand versus the need to sustain growth,'' Davide Stroppa, an economist at UniCredit Markets & Investment Banking, wrote in a note. A statement by the central bank today is quite explicit in recognizing the need of further tightening on the back of higher than envisaged inflation.

The krone jumped as much as 0.3 percent to 7.8494 per euro, before trading at 7.8692 by 4:28 p.m. in Oslo. The yield of Norway's 6 percent note maturing May 2011 gained 3 basis points to 5.15 percent.

Further Increase

"Underlying inflation is now somewhat higher than 2.5 percent,'' Norges Bank Governor Svein Gjedrem said in the statement. "The increase in inflation and the prospects of higher inflation suggest a further increase in the key policy rate.''

Growth in the mainland economy, which excludes oil and shipping, waned to 0.2 percent in the first three months of 2008, slower than expected by economists, yet adjusted for tax distortions and electricity production, in line with the central bank's expectations, according to Gjedrem.

Higher funding costs in money markets are also aiding Norges Bank's attempts to slow growth and ease pressure in the labor market. The three-month Norwegian interbank rate touched a six- year high of 6.52 percent on May 19, which is spilling over to consumers as higher mortgage costs.

The economy expanded 6 percent last year, the fastest pace since 1971, while underlying inflation, excluding tax changes and electricity, quickened to a five-year high of 2.4 percent in April.

Exceptionally Demanding

"Rate setting will be exceptionally demanding in the months to come, with significant inflationary pressures weighed against slower growth,'' Svenska Handelsbanken AB chief Norwegian economist Knut Anton Mork wrote in a client note. Handelsbanken now forecasts two quarter point rate increases from Norges Bank this year, up from a previous forecast of one rate increase.

UniCredit SpA have also revised their forecast to predict a rate increase to 5.75 percent, with the June 25 meeting the preferred option, Stroppa said.

The central bank has forecast that rates will peak at 5.63 percent in the third quarter, indicating a 50 percent chance of a quarter point increase.

Citigroup and Nordesa Bank AB, Scandinavia's biggest bank, revised up their rate forecasts ahead of the meeting, to a peak of 5.75 percent and 6 percent respectively.

Norway's unemployment rate has held at a record low of 2.4 percent for four months running, pushing up wages as companies compete for workers. Supported by soaring oil prices, Norway's OBX stock index, dominated by petroleum companies, has recovered losses from the first quarter to touch a record on May 22.

"With an economy characterized by continued strong growth, albeit slowing, and accelerating domestic inflation risks, it is difficult to foresee changes in the picture large enough to prevent the bank from continuing tightening monetary policy,'' Tina Mortensen, an economist at Citigroup Inc., said in a client note.

Hungarian Central Bank Raises Benchmark Rate to 8.5%

Hungary's central bank raised the benchmark interest rate for a third consecutive month to stop rising food and energy prices from accelerating inflation, which is already twice the bank's target.

The Magyar Nemzeti Bank in Budapest raised the two-week deposit rate by a quarter of a percentage point to 8.5 percent, the second-highest in the European Union after Romania. It matched the expectation of 16 of 21 economists in a Bloomberg poll. The bank said it is ``ready'' to lift rates more.

Hungarian consumer prices have been rising more than twice as fast as the central bank target for 19 months. The bank, in its quarterly update of its inflation forecast published today, raised predictions for price increases this year and next, which forced policy makers' hands, analysts said.

"Interest rates are close to the peak, if not at the peak,'' Anders Svendsen, an economist at Nordea Markets in Copenhagen, wrote in a note to clients. "In the absence of'' food or energy price ``shocks, we expect today's rate hike to be the last in this cycle.''

The forint strengthened to 244.09 per euro by 2:24 p.m. in Budapest from 244.35 late yesterday. The yield on the benchmark five-year bond rose to 8.86 percent from 8.80 percent.

Forecasts Raised

The inflation rate was 6.6 percent in April, compared with the central bank's 3 percent target. The bank raised its forecast for average inflation this year to 6.3 percent from 5.2 percent and for 2009 to 4.2 percent from 3.6 percent. It expects a 3 percent rate in 2010.

"Inflation is expected to remain above the long-term target on the 5-8 quarter horizon of monetary policy,'' the bank said in its inflation report.

Policy makers last month voted 7-4 to raise the benchmark rate to a three-year high of 8.25 percent, from 8 percent, and said they may lift it again as rising food and oil prices threaten to push up other costs.

Core inflation, which strips out some volatile food and energy prices and is one of the central bank's most closely watched figures, rose in April to an annual 5.6 percent from 5.3 percent in March.

Accelerating core inflation strengthens our previously held position of being ready to lift the benchmark rate to fight consumer prices in case they threaten the bank's targets, bank Vice President Julia Kiraly said on May 14.

Producer prices, an early indicator of inflation, also rose at a faster pace in March than the month before, rising to an annual 5.7 percent from 4.9 percent in February.

Malaysia Keeps Benchmark Interest Rate Unchanged

Malaysia's central bank kept its benchmark interest rate unchanged for a 17th straight meeting, avoiding an inflation-fighting increase in borrowing costs that may further weaken economic growth.

Bank Negara Malaysia maintained its overnight policy rate at 3.5 percent, according to a statement in Kuala Lumpur today. The decision was expected by all 14 economists in a Bloomberg News survey.

"Going forward, the risks to inflation are on the upside, while the risks to growth are on the downside,'' the central bank said. "Should the balance of risks shift towards higher inflation, the bank will undertake the appropriate monetary policy measures. At this stage the risks are assessed to be about balanced.''

Asian central banks have become more inclined to raise interest rates as record food and fuel costs stoke inflation. Malaysia, seeking to sustain growth after the government's worst electoral performance in March, is favoring other measures to curb prices even as inflation reached a 14-month high in April.

"The decision to some extent is influenced by politically induced domestic and fiscal policy uncertainties,'' said Suhaimi Ilias, chief economist at Aseambankers Malaysia Bhd in Kuala Lumpur. "Hence the need for interest-rate policy to do its bit to sustain domestic activities amid external headwinds in terms of a sluggish U.S. economy.''

Southeast Asia's third-largest economy is expected to grow 5 percent to 6 percent in 2008, easing from 6.3 percent last year as global trade slows, Bank Negara said in March.

'Clearer Evidence'

"There is now clearer evidence of the slowing growth in the major economies,'' the bank said. "This moderation in growth is expected to be felt by the regional economies, including Malaysia, during the second half of the year.''

Still, strong domestic demand helped the Malaysian economy perform well in the first quarter, the central bank said. Shipments of commodities shored up net exports, countering declining electronics sales, it said.

"There are strong upside risks to global inflation due to sustained high food and energy prices,'' Bank Negara said today. "While such pressures are likely to ease should global growth moderate, in the more immediate term, domestic price pressures are likely to be sustained.''

The government is trying to rein in inflation by lifting spending on agriculture to boost food supply, extending some price controls and delaying government workers' retirement age to raise incomes, Suhaimi said.

Angry Voters

Prime Minister Abdullah Ahmad Badawi, whose ruling coalition lost its two-thirds majority in parliament in March 8 elections after higher living costs angered voters, this month eased import restrictions on steel and capped the price of more types of rice to contain inflation.

Governor Zeti Akhtar Aziz, who has kept the central bank's benchmark interest rate unchanged at 3.5 percent since April 2006, has said raising borrowing costs is ``not the answer'' to check inflation in an environment where prices are spurred by supply shortfalls.

Surging Prices

Surging food and fuel prices have hurt consumers in Asia, where about 600 million people survive on less than $1 a day, prompting Indonesia this month to unexpectedly raise interest rates for the first time in more than two years. The Bank of Thailand, which kept its interest rate unchanged on May 21, said it may raise borrowing costs if inflation accelerates.

Malaysia's consumer prices rose 3 percent from a year earlier in April. The central bank forecasts inflation may average as much as 3 percent this year, accelerating from 2 percent in 2007.

Malaysia's key interest rate is at the highest since its introduction in April 2004, after policy makers lifted it three times from November 2005 to April 2006 to curb inflation.

BOJ Keeps Key Rate at 0.5% on Slowing Growth Outlook

The Bank of Japan kept interest rates on hold at the first meeting after slashing its growth estimate and shelving a two-year policy of seeking higher borrowing costs.

Governor Masaaki Shirakawa and his six colleagues unanimously voted to leave the overnight lending rate at 0.5 percent in the quickest decision in three years, the central bank said in Tokyo. The rate is the lowest among major economies.

Shirakawa said the world's second-largest economy is clearly slowing and the central bank will implement policy in a flexible manner. Board members are focusing on the risk that record oil and raw-materials costs will cause companies and consumers to pare spending, he told reporters.

"Shirakawa's comments suggest the BOJ probably won't be able to either raise or cut rates for a while,'' said Koji Shimamoto, chief strategist at BNP Paribas in Tokyo. "Global central bankers, including the BOJ, are concerned about slower growth at the same time of inflation risk.''

The yield on Japan's 10-year bond fell 1.5 basis points to 1.645 percent as of 6:03 p.m. in Tokyo. Today's meeting ended at noon, the earliest conclusion since Feb. 17, 2005.

"Japan's economic growth is slowing, mainly due to the effects of high energy and materials prices,'' the central bank said, keeping its assessment of the economy unchanged even after a report last week showed gross domestic product expanded 3.3 percent last quarter, the fastest pace in a year.

Exports, Production

Exports rose at the slowest pace in almost three years in March. Production fell the most in at least five years. Machine orders, an indicator of business investment in the next three to six months, also declined, and are forecast to drop this quarter.

Costlier oil and raw materials are squeezing profits and eroding household incomes. Japanese companies' pretax profits will decline 5 percent in the year ending March 2009, ending a seven-year streak of growth, Shinko Research Institute data showed this week.

"Corporate profits have been leveling off, albeit at a high level, and the pace of increase in fixed investment has become slower,'' the bank said.

The Bank of Japan dropped a call for gradual rate increases in its twice-yearly outlook on April 30 and cut its estimate for this fiscal year's expansion to 1.5 percent from 2.1 percent. It said consumer prices excluding fresh food will climb 1.1 percent, raising its inflation projection from 0.4 percent.

Finance Minister Fukushiro Nukaga said today that rising oil and food prices are making monetary and macroeconomic policies more difficult.

Global Inflation Risks

The risk of quicker inflation is rising globally as crude oil prices soar, Shirakawa said. Australia's central bank said it spent considerable time discussing the case for a rate increase this month, minutes today showed, as costs of fuel and food drove consumer-price gains to a 17-year high.

Shirakawa said the Bank of Japan needs to watch how consumers' rising inflation expectations affect the way companies set prices. Core consumer prices rose 1.2 percent in March from a year earlier, the fastest pace in a decade.

Some 86.2 percent of households predict prices will rise a year from now, the second-highest proportion on record, a government report showed last week.

"Bank of Japan policy makers are talking about two risks. One is higher inflation,'' said Takashi Omori, chief economist at UBS AG in Tokyo. "The other is the risk of a recession because of higher energy and food prices.''

The detailed version of the outlook report on May 1 said Japan will avoid a recession because of relatively high growth in overseas economies, low rates, and companies having already trimmed inventories, production capacity and workers.

No Change This Year

Only two of 31 economists who gave predictions through December said the bank will raise rates this year. The remaining 29 expect no change.

Before dropping language in April that said the bank would pursue higher interest rates, policy makers had for two years repeated that borrowing costs need to rise gradually as long as the economy keeps growing and prices remain stable. The report retained a warning that keeping rates low could cause excessive investment and hamper growth in the long run.

"Policy makers are currently paying more attention to the downside risks,'' said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. "We expect a 25-basis point hike in the third quarter of 2009 at the earliest.''

Mexico Bank Holds Rate, Signals Concern on Inflation

Mexico's central bank kept its benchmark interest rate unchanged for a seventh month and added language to its policy statement that indicates heightened unease about the outlook for inflation.

"Inflation pressures will rise considerably, a growing reason for concern,'' the bank said in a statement today announcing the decision to keep rates at 7.5 percent.

The comments indicate that rising consumer prices will prevent the bank from lowering the benchmark rate and may force an increase later this year, said Gray Newman, chief Latin America economist at Morgan Stanley in New York.

"While I still don't think Banxico wants to raise rates, they seem to be preparing the market that the risks to a hike are growing,'' Newman said.

The decision by Banco de Mexico's five-member board to keep the rate steady matched the forecast of all 21 economists surveyed by Bloomberg.

Mexico's annual inflation accelerated the most in almost three years last month to 4.55 percent, led by costs for housing and foods such as tomatoes and chicken. In April, the bank raised its 2008 inflation forecast, saying prices will climb 4.5 percent to 5 percent on an annual basis in the second and third quarters, and as much as 4.75 percent in the fourth quarter.

The bank targets inflation of no more than 4 percent.

Peso Record

Mexico's peso strengthened to its highest in almost five years on speculation central bankers will raise interest rates later this year to stem inflation.

The peso advanced 0.5 percent to 10.3969 per dollar at 4:47 p.m. New York time. Earlier the currency touched 10.3912, the strongest since July 2003.

Rafael Camarena, an economist in Mexico City at Banco Santander SA, the biggest trader of peso-denominated bonds, estimates central bankers will increase the key rate to 7.75 percent at their June 20 meeting. Policy makers last raised borrowing costs, by a quarter-percentage-point, in October.

The risk of contagion from the U.S. economic downturn has also increased, the bank said in its statement today. Banco de Mexico last month cut its economic growth outlook for this year to no more than 2.9 percent. The central bank expects first- quarter growth was 3 percent.

Alfredo Thorne, head of Latin America research for JPMorgan Chase & Co. in Mexico City, said the bank's statement today was balanced and didn't give a clear signal as to monetary policy in the coming months.

"I don't think they want to push the market into the dovish camp,'' Thorne said. "They would like the market to come to a midpoint.''

Slump in U.S.

Mexico is less affected by a slumping U.S. economy than it was during the U.S. recession of 2001 because of growing exports to other countries, greater domestic consumption and increased investment and public spending, Deputy Finance Minister Alejandro Werner said May 8.

The bank's board may believe increasing rates won't significantly affect inflation because consumer prices are mostly rising due to global food and energy costs, said Rodolfo Navarrete, head of research at brokerage Vector Casa de Bolsa in Mexico City.

"It looks to me like there's no agreement within the Banco de Mexico on which direction to take,'' Navarrete said. "Some are probably saying it's time to act now. Others are advising to wait.''

The median forecast of 25 economists polled by Citigroup Inc.'s Banamex unit in Mexico City on May 6 was for the central bank to not change its benchmark rate until 2009.

Egypt Raises Key Interest Rate to 10% on Inflation

Egypt's central bank raised its overnight deposit and lending rates by half a percentage point after inflation accelerated to a three-year high.

The overnight deposit rate was increased to 10 percent, while the overnight lending rate was raised to 12 percent, the central bank said in a statement on its Web site today. The Cairo-based bank boosted rates in its previous two meetings by a total of three-quarters of a point in response to accelerating inflation.

"The balance of risks to the inflation outlook continues to be on the upside,'' Rania Al-Mashat, division chief of the monetary policy unit at the central bank, said in the statement. "Authorities will not hesitate to adjust the key central bank rates to ensure price stability over the medium term.''

Urban inflation accelerated to 16.4 percent in April, exceeding the government's target range for a fourth consecutive month. The rate rose from 14.4 percent in March. Inflation in April was driven by a 22 percent increase in food and beverage prices.

"Unfortunately what the central bank can do to impact inflation is limited at the moment because most of the price hikes come from imported materials,'' said Reham El-Desoki, a senior economist at Beltone Financial, a Cairo-based investment bank.

Egypt imports about half of its grain.

Price Increases

Parliament approved price increases for several products on May 5, including fuel and cigarettes, and boosted taxes on vehicles to fund a 30 percent pay raise for state workers, amid growing public discontent over inflation.

"These price adjustments pose an upside risk to the inflation prospects,'' Al-Mashat said.

Falling U.S. dollar interest rates have prompted Egyptian depositors to change their U.S. currency-denominated deposits to Egyptian pounds, adding to money supply, Mohamed Abu Basha, an analyst at investment bank EFG-Hermes Holding SAE, wrote in a report.

Liquidity supply has grown 26 percent since March, the highest since 1999, according to the central bank.

"The central bank is trying to withdraw as much liquidity as possible from the system but the banks are not responding,'' el- Desoki said. "It is going to be useless at the end.''

Chile Central Bank Keeps Lending Rate at 6.25 Percent

Chile's central bank kept the country's overnight lending rate unchanged as policy makers bet that inflation has peaked.

Bank President Jose de Gregorio held the benchmark rate at 6.25 percent, the highest since January 2002, matching forecasts from all 20 economists surveyed by Bloomberg. Future rate changes will depend on new information, the bank said today in the policy statement on its Web site.

Inflation slowed to 8.3 percent in April from 8.5 percent in March, the biggest jump since 1996, as costs for energy and commodities such as corn and wheat rose worldwide. It was the second time annual inflation slowed in the past 12 months.

"The balance of risks has shifted away from inflation and to growth,'' said Vladimir Werning, a New York-based economist at JPMorgan Chase & Co. "This economic slowdown will eventually lead the central bank to consider cuts. At the moment the inflationary risk still makes it difficult to act.''

Growth expectations for this year have fallen to 4 percent from 5.4 percent in August 2007, according to forecasts compiled by the central bank. The bank will publish its own growth prediction for this year in a monetary policy report on May 12.

"The most recent data reaffirms the idea that annual consumer price inflation will keep falling in the course of coming months,'' the bank said.

Fuel Costs

Long-term expectations for annual inflation ``remain anchored around 3 percent,'' it said in the communique published after the policy meeting.

Annual inflation will slow to 4.7 percent at the end of this year and to 3.3 percent by April 2010, within the bank's target range of 2 percent to 4 percent, according to the median estimate of 26 economists in a central bank survey taken May 6.

Annual inflation has accelerated from 2.5 percent a year ago as frosts and drought made fresh food more expensive. High fuel prices have exacerbated an energy shortage, leading to higher electricity costs.

"The central bank is powerless to control price shocks,'' De Gregorio told a conference in Geneva on May 6. Instead, it seeks to prevent swings from rippling through the economy and leading to so-called second-round inflation. At its last meeting on April 10, the bank changed the bias on its policy statement to neutral, removing a sentence from its previous statement that said it couldn't rule out raising rates again.

Policy makers have kept the rate at 6.25 percent since January after raising it five times starting in June 2007. De Gregorio became president of the central bank in December.

The central bank last month agreed to buy $8 billion of U.S. dollars this year, increasing the bank's international reserves and curbing the appreciation of the peso.

"Today's decision was the most logical considering last month's decision to intervene in the market and the change to the bias,''' said Miguel Cardoso, chief economist at BBVA Chile in Santiago. "That's quite a strong signal about how they see monetary policy in the next few months.''

ECB Keeps Rates at Six-Year High to Fight Inflation

The European Central Bank kept interest rates at a six-year high today to fight inflation, even as the euro's appreciation and fallout from the U.S. housing slump curb economic growth.

The Frankfurt-based ECB left its benchmark refinancing rate at 4 percent, as predicted by all 53 economists surveyed by Bloomberg News. The Bank of England kept its key rate unchanged at 5 percent after three cuts since December. The ECB won't lower borrowing costs before September, according to a separate survey.

With soaring food and energy prices pushing inflation above 3 percent in the 15-nation euro region, the ECB is reluctant to follow the U.S. Federal Reserve in cutting interest rates to shore up economic growth. The International Monetary Fund estimates expansion will weaken to 1.4 percent this year from 2.6 percent in 2007 as the stronger euro hurts exports and the U.S. housing slump triggers a global slowdown.

"Recent data point to significantly lower growth in the second quarter, but the ECB is still in a wait-and-see mode,'' said Juergen Michels, an economist at Citigroup in London. "Before the ECB can cut its benchmark rate, inflation has to drop below 3 percent.''

ECB President Jean-Claude Trichet will hold a press conference in Athens at 2:30 p.m. Frankfurt time to explain the bank's decision. Policy makers meet outside Frankfurt twice a year.

Contrast With Fed

Euro-region consumer prices rose 3.3 percent in April from a year earlier after increasing 3.6 percent in March, the most in almost 16 years. The ECB, which aims to keep inflation just below 2 percent, has left interest rates unchanged since June last year.

By contrast, the Fed has reduced its main lending rate seven times since mid-September, to 2 percent from 5.25 percent, attempting to fend off a recession. Federal Reserve Bank of Kansas City President Thomas Hoenig said May 6 that serious inflation pressures may compel the Fed to increase rates again.

The ECB is concerned that companies will raise prices to pass on record raw-material costs and unions will push through bigger wage increases to compensate workers for the higher cost of living, leading to more persistent inflation.

Wages in Germany, Europe's largest economy, rose 3.3 percent in January from a year earlier, the biggest increase in 12 years. Worldwide, food prices in March were 57 percent higher than a year earlier, according to the United Nations, and oil prices breached $120 a barrel for the first time this week.

Inflation Risks

"Inflation could stay at an elevated level for a longer time than previously forecast,'' said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. "There's clearly a risk that the ECB will cut interest rates later than forecast and less aggressively.''

Policy makers including Axel Weber and Juergen Stark have said they're not sure rates are high enough to contain inflation.

"We'll monitor very closely all developments in the coming weeks and decide whether the current level of interest rates ensures we'll meet our objective'' of taming inflation, Weber said on April 21.

Since then, economic data have suggested Europe's economy is cooling. Executive and consumer confidence declined to the lowest level in more than two years in April and European retail sales dropped 1.6 percent in March from a year earlier, the most since at least 1995.

Exports from Germany, Europe's largest economy, unexpectedly fell for a second month in March, the country's statistics office said today.

Credit Squeeze

The IMF last month cut its global growth forecast and said the world economy faces a 25 percent chance of a recession.

The world's biggest financial companies have posted at least $319 billion in writedowns and credit losses since the start of last year after the U.S. market for subprime mortgages, aimed at people with poor credit histories, collapsed. That has made banks reluctant to lend, pushing up the cost of credit and roiling financial markets.

Still, Trichet this week said there are indications that some markets are improving. The current level of ECB interest rates will contribute to achieving our objective, which is price stability,'' he said on April 24, indicating the ECB may keep rates unchanged.

Eonia swap contracts, a widely used market gauge of interest- rate expectations, rose as high as 3.99 percent this week from around 3.2 percent in mid-March.

"First signs are appearing that the worst of the global financial turmoil may soon be over,'' said Holger Schmieding, head of European economics at Bank of America Corp. in London. "For now, the ECB is firmly on hold.''

Bank of England Keeps Rate at 5% to Gauge Inflation

The Bank of England kept the benchmark interest rate unchanged, guarding against inflation after three cuts in borrowing costs since December.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, left the bank rate at 5 percent, as forecast by all except five of the 61 economists in a Bloomberg News survey. The rest predicted a quarter-point reduction.

U.K. house prices had the first annual decline since 1996 last month, growth in service industries slowed to a five-year low, and manufacturing weakened. Concern that a recession is looming may deepen the disagreement among policy makers, who split three ways last month on how fast to cut the benchmark rate as higher oil and food prices stoke inflation.

"They know that growth is weaker,'' said Steven Bell, chief economist at GLC Ltd. in London and a former U.K. Treasury official. "The issue is how long they're willing to wait given that inflation is high. They'll cut at the next meeting.''

The central bank, which last cut the benchmark rate in April, will lower it to 4.75 percent by June, according to the forecasts of all but 10 of the 51 economists surveyed by Bloomberg News. The pound fell as much as 0.3 percent against the dollar after the decision, and traded at $1.9575 as of 12:44 p.m. in London.

Britain's rate is the highest of the Group of Seven nations. The U.S. Federal Reserve cut its main rate on April 30 to 2 percent, the lowest since 2004. The European Central Bank kept its rate unchanged at 4 percent today, as predicted by all 53 economists in a Bloomberg survey.

Election Woe

Prime Minister Gordon Brown's government is trying to extend the economy's 63 consecutive quarters of growth and rebuild support after his ruling Labour Party suffered its worst local- election performance in four decades on May 1.

The International Monetary Fund forecasts U.K. growth of 1.6 percent in 2008, the least since the end of the last recession 16 years ago. The economy expanded 0.4 percent in the three months through April, matching the three-year low of the first quarter, the National Institute of Economic and Social Research said today.

"If the slowing in economic activity is interpreted as supporting lower inflation, a further rate cut could be on the cards, possibly as soon as next month,'' said Barry Naisbitt, chief economist at Abbey, a mortgage lender.

Housing Slump

House prices fell 0.9 percent in April from a year earlier, the first annual drop in more than a decade, HBOS Plc said on May 2. An index of growth at services companies from banks to hotels fell to the lowest since March 2003 last month, the Chartered Institute of Purchasing and Supply said on May 6. Factory production dropped 0.5 percent in March, data showed yesterday.

Next Plc, the U.K.'s third-largest clothes retailer, said today that a sales decline worsened in the fiscal first quarter through April 26 as Britons had less money to spend in its stores.

"We need lower interest rates to underpin consumer confidence,'' Michael Coogan, director general of the Council of Mortgage Lenders, which represents U.K. home-loan providers, told Bloomberg Television before the decision. "What we need today is a cut and there's no need for them to delay until next month.''

The Bank of England offered on April 21 to swap government bonds for mortgage securities to kick-start lending between banks. They are struggling to fund their businesses after credit markets froze up following the collapse of the U.S. subprime mortgage market, leading to $319 billion in writedowns and losses at financial companies.

Bank Writedowns

Lloyds TSB Group Plc, the U.K.'s largest provider of checking accounts, said on May 6 that first-quarter profit was held back by asset writedowns and slowing insurance sales. Finance Director Tim Tookey predicted a marked slowdown for the British economy.

"The data has been weak,'' said George Buckley, an economist at Deutsche Bank AG in London. "But they're still worried about inflation and they don't like surprising the market.''

Policy maker David Blanchflower said on April 29 that the economy risks a recession unless the central bank takes aggressive action. His vote for a half-point rate reduction last month was defeated in the first three-way split for almost two years. The majority wanted a quarter-point cut and Timothy Besley and Andrew Sentance favored no change.

Inflation, at 2.5 percent in March, is likely to reach the government's upper limit of 3 percent because of higher commodity costs and the pound's weakness, King said April 29. The bank will release forecasts for growth and inflation on May 14.

Crude oil breached $120 for the first time, and United Nations figures showed food was 57 percent more expensive globally in March than a year earlier. The U.K. currency has fallen 10 percent in the past year on a trade-weighted basis, making imports more expensive.

"Inflation concerns are not abating,'' said Amit Kara, an economist at UBS AG in London who formerly worked at the Bank of England. "We will get weaker growth and the question is how weak it will be. It's really a balancing act.''

South Korea Keeps Key Rate at 5% on Inflation Concern

The Bank of Korea kept interest rates unchanged at the highest in almost seven years, saying rising commodity prices and a declining currency are stoking inflation. Bonds declined.

Governor Lee Seong Tae and his board left the seven-day repurchase rate at 5 percent in Seoul today, as predicted by 13 of 20 economists in a Bloomberg News survey. Seven forecast a cut.

Asian policy makers are battling to balance fallout from the global financial crisis against record prices for food and fuel that have stoked inflation across the region. Indonesia unexpectedly raised borrowing costs this week, while South Korea and Japan have refrained from following U.S., English and Canadian central bankers in cutting rates this year as growth slows.

"The inflation risk is too great to ignore,'' said Oh Suk Tae, an economist at Citibank Korea Inc. in Seoul. ``Policy makers need more time to justify a rate cut.''

Crude oil reached a record $123.93 a barrel in New York yesterday. Global prices for corn, wheat and soybeans have climbed to all-time highs in 2008, and rice prices have more than doubled in the past year.

Rising food and energy costs propelled South Korea's inflation to a four-year high of 4.1 percent in April, breaching the central bank's target for the sixth straight month. Consumer prices in Singapore are rising at the fastest pace in a quarter century and China's inflation rate is close to an 11-year high.

Target Breach

"Oil prices, coupled with a weaker won, are contributing a lot to inflation, which remains above our target ceiling of 3.5 percent,'' Governor Lee told reporters today. "Inflation will likely remain above the target ceiling for months ahead.''

The yield on the five-year South Korean government bond climbed 16 basis points to 5.21 percent. The Kospi index of shares slipped 0.3 percent to 1,848.22 at 2:26 p.m. in Seoul.

Adding to the central bank's inflation concerns, the Korean won has dropped 12 percent this year, the most among the world's 16 most active currencies. The won fell 2.3 percent to 1,049.50 against the dollar today, the lowest level since November 2005.

A weaker won has boosted the cost of imported goods, exacerbating the increases in commodity prices. South Korea is the world's fifth-largest importer of crude oil.

"The dilemma between growth and inflation has heightened even further,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. "The Bank of Korea's policy outlook looks heavily dependent on oil prices and the currency, the key factors for the near-term inflation outlook.''

Government Pressure

Lee has resisted pressure from the government to lower borrowing costs as the U.S. financial crisis cools the global expansion. South Korea's economy grew at the slowest quarterly pace in more than three years in the first three months of 2008 as consumers and companies curtailed spending.

Inflation in South Korea is inevitable as global food and energy costs climb, and the government should pursue policies to drive growth, Finance Minister Kang Man Soo said in an interview in Madrid this week.

The government is targeting growth of 6 percent this year after the economy advanced 5 percent in 2007.

"The political pressure is on for a cut of 25 basis points to help the economy hit an ambitious growth target,'' said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong.

Lee said today that the Bank of Korea will forecast the 2008 economic growth rate slowing to 4.5 percent or below when it releases updated estimates in July. The bank in December predicted the economy would expand 4.7 percent this year.

Exports Climb

As well as stoking inflation, the won's drop versus the dollar this year has helped Samsung Electronics Co. and other exporters by making their products cheaper abroad and increasing the value of their overseas sales translated into the local currency.

Exports jumped 27 percent in April from a year earlier. Overseas shipments were the engine of more than half of the economy's 0.7 percent expansion in the first quarter.

"The case for any easing at all for the remainder of the year is entirely data dependent,'' Neumann said. ``Rate cuts this year in Korea? No longer a slam dunk.''

Australia Keeps Key Rate Unchanged at 12-Year High

Australia's central bank left interest rates unchanged for a second month, saying there is mounting evidence the highest borrowing costs in 12 years will slow the economy enough to cool the fastest inflation since 1991.

Governor Glenn Stevens kept the overnight cash rate target at 7.25 percent in Sydney today, as forecast by 24 of 25 economists surveyed by Bloomberg News.

Today's decision indicates policy makers judged four interest rate increases in seven months will bring inflation back under the bank's 3 percent limit after reports in the past month showed consumer and business confidence have slumped, retail sales have slowed and home building has fallen. Evidence is accumulating that growth in demand will slow this year, Stevens said.

"Stevens wants to see domestic demand continue to slow, and if it doesn't he will increase rates again," said Adam Carr, senior economist at UBS AG in Sydney.

The Australian dollar fell to 94.45 U.S. cents at 3:05 p.m. in Sydney from 94.75 cents just before the decision was released. The two-year government bond yield fell 7 basis points to 6.51 percent. A basis point is 0.01 percentage point.

"Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation," Stevens said in a statement released on the central bank's Web site. "On balance, the board's current assessment is that demand growth will remain moderate this year."

Global Rates

If the economy doesn't slow as expected, or ``expectations about high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed,'' Stevens added.

The Reserve Bank has raised borrowing costs 12 times since May 2002, when the rate was 4.25 percent. By contrast, Federal Reserve Chairman Ben S. Bernanke lowered the benchmark U.S. interest rate by a quarter point to 2 percent last week, the seventh cut since September. The U.K. and Canada have also reduced rates this year to cushion their economies against fallout from the global credit squeeze.

Most economists surveyed by Bloomberg News before today's decision say Stevens will leave the benchmark rate unchanged for the rest of this year as slower household and business spending bring annual inflation back within his target range of between 2 percent and 3 percent. He increased the rate in March, February, November and August.

Core Inflation

Surging gasoline, food and housing costs helped push core annual inflation to 4.4 percent in the first quarter, the highest rate in almost 17 years, a report showed on April 23.

Another index measuring inflation rose at a record pace in April as costs for gasoline, health services and rent surged. Consumer prices climbed 4.3 percent from a year earlier, according to a gauge published by TD Securities Ltd. yesterday.

"In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected," Stevens said today.

The Reserve Bank will lower its forecasts for economic growth and inflation when its quarterly policy statement is released on May 9, Stevens told a parliamentary committee in Sydney on April 4.

Recent reports suggest the $1 trillion economy is losing momentum in its 17th straight year of expansion. March home- building approvals fell six times as much as economists forecast, sales of newly built houses dropped for a second month, consumer confidence plunged in April to the lowest since 1993, and companies remained pessimistic for a third month in March.

Economic Growth

Gross domestic product slowed to 0.6 percent in the fourth quarter from the previous three months, when it expanded 1.1 percent. The first-quarter GDP report will be released on June 4.

Investors expect the central bank will leave the benchmark lending rate unchanged in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps. At the start of last month, traders forecast more than half a percentage point of reductions.

Households, grappling with higher gasoline and food costs, are also facing extra increases in mortgage rates by commercial banks. The nation's five largest lenders, led by Commonwealth Bank of Australia, have added an average of almost 90 basis points, or 0.9 percentage point, to home-loan interest rates this year. The Reserve Bank has added only 50 basis points in that time.

Retail sales excluding food slid 0.3 percent in March from February, according to Helen Kevans, an economist at JPMorgan in Sydney.

Jobs, Wages

Concern that the lowest unemployment rate in 33 years is driving up wages was a key reason the Reserve Bank raised borrowing costs in March.

The bank forecast in March that inflation will remain above 3 percent until 2010 as Chinese demand for coal and iron ore prompts companies such as miner Rio Tinto Group to expand and hire more workers in Australia.

"The last thing the Reserve Bank wants is for people to assume that the inflation battle is over and the next move in interest rates is down," said Craig James, chief equities economist at Commonwealth Bank.

"The Australian economy remains in good shape. If rates are likely to move over the coming year, they are still more likely to rise."

Saudi Lowers Rates a Quarter Point

Saudi Arabia, which pegs its currency to the dollar, cut its key interest rate by a quarter of a percentage point to 2 percent, following a reduction by the U.S. Federal Reserve.

The central bank left its benchmark repo rate unchanged and raised banks' reserves requirement with the aim of slowing credit growth, said John Sfakianakis, chief economist at Saudi British Bank. The Saudi Arabian Monetary Agency, the central bank, does not communicate rate decisions directly to the media.

"Increasing the reserves requirements for banks means that they have to keep more money in their vaults,'' Sfakianakis said by telephone from Riyadh today. "So banks have less money to lend, which is an attempt to curb inflation.''

Inflation is running close to 10 percent in Saudi Arabia after the U.S. currency lost 13 percent of its value against the euro in the last 12 months, stoking record inflation in the region. Central banks that fix their currencies to the dollar need to follow U.S. monetary policy to prevent currency inflows or outflows from upsetting the peg. The Saudi riyal jumped to a 20-year high against the dollar in September after the Saudi Arabian Monetary Agency chose not to follow a Fed rate cut.

Saudi Arabia reduced the so-called reverse repo rate by 25 basis points, curtailing any speculation about its commitment to the dollar after the United Arab Emirates, Bahrain and Qatar cut their key rates May 1. The Fed lowered its benchmark interest rate April 30 to 2 percent, its seventh cut since September.

The kingdom left its benchmark repo rate unchanged at 5.5 percent, raised banks' reserves requirement by one percentage point to 13 percent, and doubled the rate on the reserve requirements of time deposits to 4 percent from 2 percent, the banker said.

Fed Trims Rate to 2%, Signals Ready to Consider Pause

The Federal Reserve lowered the benchmark U.S. interest rate by a quarter point to 2 percent and indicated it's ready to pause after seven cuts since September.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time," the Federal Open Market Committee said in a statement after meeting today in Washington. The central bank also warned that some indicators of inflation expectations have risen in recent months.

Chairman Ben S. Bernanke and his colleagues dropped a reference to downside risks to the economy, while acknowledging the damage that the housing slump has wrought on the six-year expansion. Stocks surrendered gains on speculation the most aggressive monetary-policy easing in two decades is approaching an end.

"We do not expect to see a rate cut at the next few meetings without a substantial contraction of the economy," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "We are not yet to Memorial Day weekend, but the Fed effectively told us today to take the summer off."

Inflation Outlook

Oil prices reached another record high of $119.93 a barrel on April 28. The Fed said indicators of inflation expectations have risen.

"The committee expects inflation to moderate in coming quarters, reflecting the projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization," the Fed added. "It will be necessary to continue to monitor inflation developments carefully," the Fed said.

At the same time, the economy is faltering. Hours before the Fed decision, the Commerce Department reported that gross domestic product increased at an annual pace of 0.6 percent last quarter. Spending by households, the biggest part of the economy, grew at the slowest pace since 2001, when the U.S. economy was in a recession.

The Fed Board of Governors also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.25 percent. Officials reduced the normal 1-point spread over the federal funds rate in August to a half point to ease liquidity constraints. They further narrowed the difference on March 16, in the first weekend emergency move since 1979.

Fisher, Plosser Dissent

Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented from today's decision, preferring no change. They also objected to last month's reduction.

Central bankers have reduced the target rate for overnight loans between banks by 2.25 percentage points in 2008 with a series of aggressive rate actions, including two three-quarter point cuts. In addition, the Fed invoked emergency authority in March to start lending directly to investment banks. The central bank also provided $29 billion of financing to secure JPMorgan Chase & Co.'s takeover of Bear Stearns Cos.

The actions have reduced risk premiums for financial firms, and stock prices have climbed since the previous Fed meeting on March 18.

The Standard & Poor's 500 Index has rallied since Fed officials last met. Yields on five-year debt of Fannie Mae, the largest U.S. mortgage company, have fallen to 0.56 percentage points over Treasury notes of similar maturity, down from 0.90 percentage point.

Credit Losses

The world's biggest financial companies have posted at least $312 billion in writedowns and credit losses since the start of last year as the subprime mortgage market collapsed.

U.S. foreclosure filings more than doubled in the first quarter as payments rose for subprime adjustable mortgages. One in every 194 U.S. households, or 650,000 properties, were in some stage of foreclosure during the quarter, according to Irvine, California-based RealtyTrac Inc., a vendor of data.

While easing borrowing constraints, the central bank has also pushed money market yields below inflation, giving consumers an incentive to spend or take on more risk in their investments to earn a return. The Fed's preferred inflation barometer, the personal consumption expenditures price index, minus food and energy, rose at a 2.2 percent annualized rate in the first quarter. Six-month Treasury bills yield 1.7 percent.

Public expectations of inflation five years ahead rose to 3.2 percent April, the fastest since October 2005, as measured by a Reuters/University of Michigan survey.

"The two dissents show they are still worried about inflation,'' said Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc. ``This is a Fed ready to watch from the sidelines."

Meanwhile, housing markets are still in a slump. Home prices in 20 U.S. cities fell in February by the most on record. The S&P/Case-Shiller home-price index dropped 12.7 percent from the same month a year earlier, the most since the figures were first published in 2001. Builders broke ground on 947,000 new homes at an annual rate in March, the fewest since March 1991.

RBI raises CRR to 8.25%, other rates steady

India's central bank said on Tuesday it was raising its cash reserve ratio (CRR) by 25 basis points to 8.25 per cent with effect from May 24 to control inflation-stoking cash in the system but kept all other official rates unchanged.

It forecast economic growth of 8.0 to 8.5 per cent in the fiscal year that began this month, after an estimated 8.7 per cent in 2007/08, and aimed for inflation of 'around 5.5 per cent' this fiscal year but with the goal of lowering it close to 5.0 per cent as soon as possible.

The Reserve Bank of India (RBI) said managing liquidity would continue to receive priority in its policy objectives but warned it would act swiftly to curb any signs of 'adverse developments' in inflation expectations.

The unexpected increase in the CRR , the amount of funds banks have to keep on deposit with the central bank, follows a surprise two-stage rise earlier in April to 8.0 per cent. The second stage of that increase has still to take effect on May 10.

The RBI kept its key lending rate steady at 7.75 per cent and left the reverse repo rate, the rate at which it absorbs excess cash from banks, unchanged at 6.0 per cent.

The bank rate, which is used to price medium-term and long-term loans, remained at 6.0 per cent.

The decision comes as annual inflation holds above 7 per cent, its highest in more than three years, due in part to rises in international food, oil and metal prices.

A slim majority of economists polled by Reuters last week had predicted no change in rates, including the CRR, but a substantial minority had expected one or more of the key interest rates to rise.

Malaysia keeps interest rates steady at 3.50%

Malaysia's central bank kept interest rates on hold on Tuesday, as expected, continuing to extend a lifeline of cheap credit to a slowing economy.

Bank Negara left its official rate at 3.50 per cent for the 16th straight meeting but voiced concerns over the outlook for inflation, saying it was looking for signs that slowing global economic growth could ease price pressures.

'After evaluating the evidence on the downside risks to growth and the upside risks to inflation, the bank has decided to maintain the current stance of monetary policy,' Bank Negara said in a statement.

NZ central bank holds rates, softens tone

New Zealand's central bank kept interest rates steady at 8.25 per cent as expected on Thursday, but softened its stance on an eventual rate cut as the economy slows, sending the currency lower.

The Reserve Bank of New Zealand (RBNZ) said the economy was slowing more than expected, although it stuck to its previous script that inflation pressures remained persistent from high oil and food prices, and other sources.

It expected rates to stay on hold for some time yet, but analysts noted it had dropped the phrase 'significant time' used in the March statement.

'It suggests we are starting to see the Reserve Bank's stance shift a little bit, and it looks a bit more likely the bank could be cutting by the end of the year, instead of holding off until next year,' said ASB Bank chief economist Nick Tuffley.

The New Zealand dollar extended initial losses to settle around half a cent lower at $0.7930/40 at 2135 GMT.

Bank bills rallied with the yield on the December contract 10 basis points lower at 8.32 per cent.

All 17 analysts surveyed by Reuters had expected the central bank to leave rates on hold, with a median risk for a 25 basis point cut put at just 10 per cent.

New Zealand's cash rate is the highest in the industrialised world, but has been on hold since the middle of last year as other key global rates, including those in the United States and some other G7 nations, have been cut to stave off the effects of the global credit crisis.

New Zealand's central bank said financial market turbulence was continuing to add uncertainties to the weaker global outlook, while domestic activity was slowing more than expected as the housing market rapidly cooled following four interest rate increases last year.

'We see significant downside risks to future activity but upside risks to inflation,' central bank governor, Alan Bollard, said in a statement.

'Given this outlook, we expect that the OCR (official cash rate) will need to remain at current levels for a time yet to ensure inflation outcomes of 1 to 3 per cent on average over the medium term.'

Evidence is mounting that the New Zealand economy is slowing down. It expanded 3.1 per cent in 2007 but analysts expect growth this year of 1.7 per cent.

House price inflation eased for the seventh straight month in March, while the number of house sales has fallen dramatically, down 53 per cent on a year earlier.

Retail sales stalled in February; manufacturing activity contracted in March to its lowest level since late 2005; business confidence fell to a 33-year low in the NZ Institute of Economic Research's quarterly survey; and consumer confidence was at a 10 year-low in the first quarter.

Still, the central bank said inflation remained a threat, pointing to a tight labour market, looser government spending and surging food and oil prices.

Mr Bollard said there was a risk that short term price shocks from rising food and oil costs, which the central bank has said it would look through, could lead to higher wage growth and perpetuate inflation pressures.

Data showed last week that annual inflation hit its highest level in 18 months at 3.4 per cent in the first quarter, driven by higher fuel and food prices.

The central bank has forecast inflation will stay above its 1-3 per cent target band until mid-2009.

The latest Reuters poll showed 11 of 17 forecasters expected a rate cut by the end of 2008.

Financial markets are pricing in a 40 per cent chance of a rate cut by the end of the year, and some expect that the central bank will need to start cutting aggressively.

Canada Cuts Rate by 50 Basis Points as Economy Slows

The Bank of Canada lowered its benchmark rate by half a point to revive an economy that's growing at its slowest pace in 16 years, and signaled more easing may be needed "in the medium term.''

The rate on overnight loans between commercial banks dropped to 3 percent, the lowest since December 2005, as forecast by 28 of 32 economists in a Bloomberg survey.

The Canadian dollar fell as some investors bet that the statement signals borrowing costs will be lowered again in the next few months. Policy makers reduced their 2008 economic growth forecast to 1.4 percent, the lowest since 1992, from a January forecast of 1.8 percent, and said inflation will stay below their 2 percent target until 2010.

"Obviously the risks are the Bank of Canada will cut more going forward,'' said Karen Cordes, an economist at Scotia Capital Inc. in Toronto.

Cordes, who predicts a quarter point reduction at the next meeting, scheduled for June 10, said the central bank's statement ``leaves the door open for more than we were previously expecting.''

The Canadian currency weakened 0.7 percent to C$1.0123 per U.S. dollar at 10:21 a.m. in Toronto, from C$1.0054 yesterday.

Canada sends about three-quarters of its exports to the U.S., and the economic crisis in that country has sapped demand for Canadian lumber and cars.

`Medium Term'

"Some further monetary stimulus will likely be required to achieve the inflation target over the medium term,'' the bank said today. "The timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada.''

Policy makers will cut the key rate again at their June meeting unless the economy turns around, said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. The central bank dropped a reference from its March 4 statement, which hinted rates would be cut again in the ``near term.''
"They don't want the market to assume they will be cutting in June just yet,'' Porter said. Still, he said, "it's reasonable to assume a quarter point trim in June.''

The rate cut narrows Canada's biggest rate premium over the Federal Reserve's benchmark in four years, a gap that's kept the currency close to parity with the U.S. dollar. Traders anticipate the Fed will lower its 2.25 percent rate by a quarter of a point on April 30, as the U.S. economy may already be in a recession.

Subprime Fallout

The Bank of Canada, on its own and in tandem with counterparts in the U.S. and Europe, has pumped billions of dollars into the financial system, accepted new collateral on loans and sought wider powers to tackle problems stemming from the U.S. subprime mortgage collapse.

Prices excluding eight volatile items -- the gauge used by policy makers to predict trends -- advanced 1.3 percent last month from the year before, the slowest since July 2005.

Overall consumer prices rose 1.4 percent in March from a year earlier, slower than U.S. inflation of 4 percent and German inflation of 3.3 percent.

The central bank releases an updated inflation and economic growth in two days, followed by a press conference by Governor Mark Carney.

Philippine central bank to keep key rates steady but faces pressure to tighten

The Philippine central bank is expected to leave key interest rates steady next week but policymakers may be forced to lift rates within the year to curb rising inflation, economists said on Friday.

The central bank will hold its policy-setting meeting next Thursday and will likely keep its overnight rate at 5.0 percent for borrowing and 7.0 percent for lending, according to five economists polled by Thomson Financial.

Policymakers kept interest rates unchanged at the last meeting on March 13 after slashing them by a total 100 basis points between October and January amid rising inflationary pressure.

The Philippine consumer price index rose 6.4 percent in March from a year earlier, its fastest clip in 21 months, amid surging food and energy prices.

Economists say inflation, which is running above the government's full-year target of 3 percent to 5 percent, could soar to as high as 9 percent in the second quarter.

Soaring prices of basic commodities may crimp consumer spending, a key driver of growth for the Southeast Asian nation, and this worry is weighing on the Philippine peso. At the start of the year the central bank said inflation should remain within its target as the firm peso would help keep imported oil and other commodities less expensive.

"The rise in inflation has been negative for the peso," said Bear Stearns & Co. in a recent note. It also said that Philippine inflation might be "lagging behind a similar pattern of rising inflation levels in Indonesia (currently at 8.17 percent) by three to four months."

The peso has weakened by less than 2 percent against the U.S. dollar so far this year, after gaining nearly 19 percent in 2007 on strong foreign exchange inflows.

Inflation factor

To control domestic liquidity, which had been expanding at alarming rates because of strong remittances from Filipinos working abroad, the Philippine central bank widened last year its special deposit account (SDA) windows to encourage more financial institutions, including those state-owned, to place more funds with the central bank.

But last month the central bank announced changes to the terms of the SDA facility, shutting the windows for two-, three-, and six-month tenors, and reducing interest rates on the remaining shorter maturities. The move was intended to boost banks' loanable funds that will help ensure the domestic economy keeps growing.

"Despite the recent inflation surprise, the authorities appear (to be) in a holding pattern, awaiting evidence of a cooling in price pressure over the coming months," said Frederic Neumann, economist at HSBC in Hong Kong, who expects the Philippine central bank to keep rates and access to the SDA facility unchanged next week.

But Neumann said price pressures are likely to be stronger than earlier thought, with headline inflation possibly rising as high as 8-9 percent by this summer.

The Philippines is one of the world's top importers of rice, the staple food for this country of nearly 90 million people, and is also a net oil importer.

Rice prices surged 10.9 percent in March after rising 7.7 percent in the previous month. Experts say rice prices are likely to keep surging as production of the grain fails to keep up with increasing demand.

Rising food costs have overtaken high energy prices as the primary inflationary threat in some Asian countries.

But record oil prices continue to add to inflationary pressures. The price of crude struck a new record high this week above $115 a barrel on the New York Mercantile Exchange amid a weakening dollar.

Rising food and energy costs have already triggered calls for hikes in wages and transport fares in the Philippines.

"Even with cooling growth, inflation is likely to linger for some time as second-round effects kick in. We therefore expect the central bank to raise rates over the course of this year, with a 25-basis point hike possible soon, with more to come thereafter," said HSBC's Neumann.

Economists at Bear Stearns said the Philippine central bank might have prematurely lowered interest rates and "may face the embarrassing task of raising these rates again in coming months."

But Jonathan Ravelas, chief strategist at Banco de Oro Unibank, said monetary authorities will likely stick to their wait-and-see stance for a few more months.

"The rise in inflation is driven by supply-side developments and the central bank is unlikely to respond to these developments with tightening measures, and also because there is a need to stimulate the domestic economy given the global economic slowdown," Ravelas said.

Fed delivers 3/4-point rate cut

The Federal Reserve slashed US interest rates on Tuesday, boosting Wall Street, which was already higher on stronger-than-expected investment bank earnings.

Tuesday's three-quarters of a percentage point rate cut was less than the full percentage point many in the market had expected, but the Fed left the door open to an additional reduction. However, it noted its future action would take inflation concerns into consideration.

The dollar soared to its largest single-day gain against the yen in nine years and rallied against the euro as traders responded to the less-than-expected rate cut. But US Treasuries fell as investors poured into stocks.

The Fed's action, taken on an 8-2 vote of its policy committee, was part of an intense effort by the central bank to avert a deep recession and financial market meltdown. The move took benchmark overnight rates down to 2.25 per cent, the lowest since February 2005.

The central bank has now cut rates by an aggressive 3 percentage points since mid-September, including 2 points since the start of the year. In addition, it has said in recent days it would provide around US$400 billion worth of liquidity to thaw frozen credit markets.

'Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,' the central bank said.

In a statement outlining its rate move, the Fed said downside risks to economic growth remained even in the wake of the rate cut, suggesting an openness to lowering borrowing costs further if needed.

However, in the first double-dissent since September 2002, two officials - Philadelphia Federal Reserve Bank President Charles Plosser and Dallas Fed chief Richard Fisher - voted against the decision. They preferred less-aggressive action out of a concern sharp rate cuts could further fuel inflation.

Still, the Fed said it expected inflation to ease, partly because unemployment looked set to rise.

The rate action came two days after the central bank announced up to US$30 billion in financing to facilitate the sale of cash-strapped investment bank Bear Stearns, an unusual intervention bank officials said was necessary to prevent cascading defaults in the financial system.

Its backing for JPMorgan Chase and Cos agreement to buy Bears Stearns was one of a number of emergency steps the Fed announced on Sunday.

It also said it would extend loans to a wider array of Wall Street firms, not just commercial banks, for the first time since the Great Depression.

In addition, the Fed lowered the interest rate on 'discount window' lending by a quarter-point on Sunday. On Tuesday, in concert with its decision to cut its target for overnight interbank lending by three-quarters of a point, it lowered the discount rate again by a matching amount, to 2.5 per cent.

US Fed takes emergency steps to help financial system

The US Federal Reserve announced two emergency measures on Sunday to safeguard the financial system, lowering the discount rate it charges on direct loans to banks and announcing a new programme to lend directly to other big financial firms.

The central bank said in a surprise statement that it cut the discount rate to 3.25 per cent from 3.5 per cent, effective immediately, which puts that rate just a quarter point above the interbank overnight federal funds rate, the Fed's primary policy tool.

It also said it was setting up a new lending programme under which so-called primary dealers could borrow directly from the Fed at the discount rate.

'The Federal Reserve in close consultation with the Treasury is working to promote liquid, well functioning financial markets, which are essential for economic growth. To that end we took two steps today,' Fed Chairman Ben Bernanke said in a rare conference call with reporters. 'These steps will provide financial institutions with greater assurance of access to funds.'

It also said it was setting up a new lending programme under which so-called primary dealers could borrow directly from the Fed at the discount rate.

'Liquid, well-functioning markets are essential for the promotion of economic growth,' the Fed said.

The central bank said the new lending facility for the primary dealers, big Wall Street firms with which it deals directly in financial markets, would be open for business on Monday and would be kept in place for at least six months.

The central bank said the new lending facility for the primary dealers — big Wall Street firms with which it deals directly in financial markets — would be open for business on Monday and would be kept in place for at least six months.

It is aimed 'to improve the ability of primary dealers to provide financing to participants in securitisation markets',the central bank said. The loans extended under the new programme can be backed by a broad range of investment-grade debt securities as collateral.

Both actions were approved unanimously by the Fed's Board of Governors.