U.S. risks stagflation: BIS chief

By Brian Love, European Economics Correspondent

BASEL, Switzerland (Reuters) - Stagflation is an increasingly plausible prospect in the United States and weak economic growth could last well into 2009, if not longer, the head of the Bank for International Settlements says.

That does not herald a rerun of the economic stagnation and rampant inflation that ran riot during the 1970s when oil prices last soared to unprecedented levels, Malcolm Knight, BIS general manager, said in an interview late last week.

But it does cast some doubt on the White House's thesis that the economy will rebound in the second half of 2008 in response to the tens of billions of dollars of tax rebates the government will be delivering to U.S. households in the coming weeks.

"I see a certain amount of scope for stagflation in a number of economies and that usually tends to result in subpar economic growth performance for an extended period of time, which could go well into 2009 or even longer," said Knight, a Canadian who worked for more than 20 years at the International Monetary Fund.

"I think the U.S. economy is likely to experience weakness this year and in much of 2009," said Knight, speaking to Reuters at BIS headquarters in Basel, Switzerland.

"Stagflation is a definite risk."

U.S. Treasury Secretary Henry Paulson said on Tuesday that the aim of a $152-billion stimulus plan, mostly comprised of tax rebates, was to give the economy a new lease of life that would show through already this year.

His reassurances on Fox TV coincided with more bad news on inflation -- that retail petrol prices rose nearly 10 cents in just one week to hit a high of $3.60 a gallon, driven by record world oil prices of close to $120 per barrel.

Knight said the recent acceleration in food prices across the globe had been a surprise but nonetheless appeared to be driven by fundamental forces such as surging demand.

While Europe was in a stronger position than the United States, there were signs of weakness there too of late, Knight said.

"The emerging market economies are still growing very rapidly and probably see the main challenge as the recent increases in their inflation rates," he said.

POOR VISIBILITY

From his 17th-floor office Knight's view stretches into France and Germany, on a clear day.

Little else is clear since the downturn in U.S. housing and the collapse of the subprime mortgage market triggered a global financial markets crisis last August which has forced banks to report well over $200 billion in losses and writedowns, so far.

"I think it's really not possible to predict exactly where we are in the deleveraging process," he said. "I'd certainly hope that we're half-way through it."