Central banks should keep raising rates: BIS's Knight

By Krista Hughes and Sven Egenter

BASEL, Switzerland (Reuters) - Central banks around the world should raise interest rates further to curb inflation pressures, the Bank for International Settlements said on Sunday.

The global economy is poised for a fifth straight year of growth above 4 percent, but risks remain and have as their common thread the highly accommodative financial conditions that have buoyed it in recent years, BIS General Manager Malcolm Knight said.

Tighter rates would have the added benefit of reining in financial markets, which Knight said were still loaded with risk, possibly sowing the seeds for a nasty correction in assets and currencies.

"Financial conditions are still accommodative, access to credit remains easy and credit spreads are at record lows," Knight said after talks with about 250 central bankers at the BIS annual general meeting.

"Containing inflationary pressures seems to require further tightening in most jurisdictions, as is expected by financial markets."

Central banks are concerned about excess liquidity in the face of strengthening growth, pushing up borrowing costs around the world. The Bank of England is seen hiking again in July or August, the Bank of Japan in August, the European Central Bank is expected to raise rates in September and markets have now abandoned hopes of a cut in U.S. interest rates.

In its annual report, also released on Sunday, the BIS cited a resurgence in inflation, the chance of a sharper slowdown in the United States and financial market vulnerabilities as key risks to future global prosperity.

Financial markets may have become "irrationally exuberant", it said, borrowing a phrase used by former U.S. Federal Reserve Chairman Alan Greenspan to describe the stock market boom of the 1990s.

Knight said although real risk premiums had gone up in recent weeks as bond prices tumbled, they had come from very low levels and investors were still accepting a fair amount of risk.

"The robust performance of the world economy can in part justify such vibrancy," he said in his speech to the AGM.

"Even so, it is hard not to detect in the current climate that sense of exuberance, even hubris, that in the past has not augured well for subsequent developments."

GOING FINE

Top officials from the U.S. Federal Reserve, ECB, BOJ and People's Bank of China attended the weekend meetings in the Swiss city of Basel, as well as representatives from more than 100 other central banks.

Policymakers attending the meetings also expressed optimism about the world economic outlook.

"Everything is going fine," ECB Governing Council member Yves Mersch said when asked about the global economy.