Reply #56: Central Banks May Stay Course, Undaunted by Markets [View All]

http://www.bloomberg.com/apps/news?pid=10000102&refer=uk&sid=aYfjODgcX6KM

June 9 (Bloomberg) -- The world's central bankers are likely to keep raising interest rates to snuff out faster inflation, undeterred by the turbulence their words and actions are having on global financial markets.

``They shouldn't be happy, but they have a job to do, which is keep their eye on inflation,'' said Harvard University Professor Martin Feldstein, once a candidate to succeed Alan Greenspan as Federal Reserve chairman, a job that went to Ben S. Bernanke.

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The ECB, Bank of Korea, Reserve Bank of India and South African Reserve Bank all raised rates yesterday, sending Asian stocks to the biggest slide in two years and pushing Europe's Dow Jones Stoxx 600 Index to its low for the year. Prices for zinc, copper and aluminum weakened, while bonds rose. The Dow Jones Industrial Average rose 0.1 percent yesterday after losing as much as 1.6 percent.

European and Asian stocks rebounded today and emerging markets equities rose as some investors said the sell-off was excessive.

``The contentious bit is the old one about whether central banks should pay particular attention to asset prices,'' said Christopher Allsopp, who teaches economics at Oxford University and is a former Bank of England policy maker. ``They take them into account and they react quickly, but they shouldn't divert from their overall remit of inflation-targeting.''

Bernanke Comments

Bernanke, who had been criticized for not tackling inflation aggressively enough, kicked the week off by telling a banking conference in Washington on June 5 that price increases were too fast for his comfort. Traders judged a quarter-point increase in the Fed's rate this month to 5.25 percent to be almost a done deal after the remarks. The Fed's tightening cycle, the longest in a generation, began in June 2004.

Avoiding `Blunders'

Central bankers are particularly keen not to let inflation expectations gather momentum. That's important because if companies and workers believe inflation is headed higher, their actions may help bring that result. Companies will raise prices, while workers will demand higher wages.

``The big policy blunders have been associated with the failure of central banks to keep inflation expectations under control,'' said Mark Gertler, head of New York University's economics department, who wrote a series of papers with Bernanke when the chairman was a professor at Princeton University. ``That is where the current Fed is coming from.''

/more academic stuff...