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Thu 30 Nov 2006 04:00 AM

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US Fed Reserve predicts inflation rise


Hawkish comments by Ben Bernanke, the Federal Reserve chairman, giving warning of a persistent inflation threat and talking up US growth prospects, kept open the door last week to further rises in American interest rates.

Mr Bernanke’s challenge to markets’ expectations that the Fed may cut rates as early as spring failed to bolster the dollar, however. The struggling US currency succumbed to fresh losses as traders focused instead on yesterday’s spate of bleak US economic figures.

The further losses by the dollar, undercut by markets’ belief that US rates will soon fall even as those in Europe are rising, drove it to two-year lows of US$1.95 against the pound, while the euro also climbed above US$1.32 for the first time since March 2005.

The Dow Jones industrial average, however, managed to close 14.80 points higher at 12,136.50.

Earlier, in a toughly worded speech, Mr Bernanke made clear that the Fed’s focus is firmly on its anxieties over inflation, and that it is relatively sanguine over the impact on growth from America’s deepening housing-market slump.

Core US inflation, excluding volatile food and energy prices, remained “uncomfortably high”, he said. While it was expected to “slow gradually from its recent level”, he added that “the risks remain primarily on the upside”.

Reinforcing his message, he went on: “Given the current level of inflation, a failure of inflation to moderate as expected would be exceptionally troublesome.”

Mr Bernanke coupled his stern view on the inflation threat with an upbeat assessment of US growth prospects, despite the toll from sliding house prices. “Over the next year or so the economy appears likely to expand at a moderate pace, close to, or modestly below the economy’s long-run sustainable pace,” he said.

The Fed chief’s analysis was echoed earlier by the Organisation for Economic Coperation and Development. But markets appeared to be more focused on a series of disappointing US economic figures.

Prices for existing homes in America suffered another record fall last month, dropping by an average 3.5% from a year earlier, the US National Association of Realtors said. Durable goods orders to US factories also tumbled by 8.3% in October, their sharpest fall for six years.

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