Central banks go on offensive against inflation

By Burton Frierson and Brian Love

NEW YORK/PARIS (Reuters) - Central bankers on both sides of the Atlantic escalated their verbal offensive against inflation on Tuesday, sparking a rise in the U.S. dollar and falls in stock and bond prices.

The central bankers' comments came against the backdrop of growing consumer discontent over soaring food and fuel prices, with protesters marching in Asia over soaring oil prices and Spaniards stockpiling fuel and food due to a truck drivers' strike over high oil prices.

In Europe, Erkki Liikaken, a Finnish member of the European Central Bank's rate-setting Governing Council, said the euro zone's central bank was in a state of "heightened alertness" over inflation" and that a rate rise in July is possible though not certain.

In the U.S., Dallas Federal Reserve President Richard Fisher also indicated that soaring prices were a bigger threat than a weak economy, saying he would pay the price of weaker economic growth if that kept inflation in check.

"We want to make sure the message is clear ... that we will not countenance building inflationary expectations," Fisher said in a speech in New York.

The Bank of Canada also signaled its concern about inflation and surprised markets by keeping its key interest rate steady at 3.0 percent, implying an end to its rate-cutting cycle.

WHIP INFLATION NOW

The central bankers' anti-inflation campaign was highlighted late Monday when U.S. Federal Reserve Chairman Ben Bernanke reiterated the Fed's mission to prevent soaring fuel and food costs from raising consumer expectations of ongoing prices rises.

Surprisingly, Bernanke played down the problems of a U.S. economy hit by a housing market slump and kept the focus firmly on inflation given oil prices are near all-time highs.

"Although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so," Bernanke told a conference in Boston.

"The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations," he said.

As rising fuel prices fanned the fears of inflation, the U.S. government's top energy forecaster on Tuesday raised its projections for 2008 oil prices by nearly 12 percent.

The U.S Energy Information Administration said benchmark West Texas Intermediate oil prices would average $122.15 a barrel, up from its previous forecast of $109.53 a barrel.

Last Friday crude oil prices on the New York Mercantile Exchange reached a record $139.12 a barrel.

European Central Bank chief Jean-Claude Trichet, who shocked markets last week with an announcement that ECB rates could rise in July, also reiterated his comments on Monday.