Central bankers on both sides of the Atlantic unleashed a further verbal offensive on inflation, sparking a rise in the US dollar and drops in stock and bond prices on Tuesday. The Bank of Canada surprised markets by keeping its key interest rate steady at 3.0 percent and signalling an end to its rate-cutting cycle as it said inflationary pressures were surprisingly strong.
In April, the Bank of Canada bank had signalled another rate cut was in the pipeline but was vague on the timing of any move. Primary securities dealers surveyed by Reuters had unanimously predicted a quarter-point cut in the overnight lending rate.
"The bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2.0 percent inflation target," the Bank of Canada said in a statement.
Late Monday, US Federal Reserve Chairman Ben Bernanke played down fears about slowing US economic growth and made it clear that the Fed's mission right now was to prevent the spike in world fuel and food costs feeding into longer term inflation. On Tuesday, Dallas Federal Reserve Bank President Richard Fisher picked up the baton, saying he would pay the price of weaker economic growth if that kept inflation in check.
Adding his voice to the anti-inflation chorus, Boston Federal Reserve President Eric Rosengren said on Tuesday that rising food and energy costs are still trickling through the economy, complicating the outlook for inflation.
European Central Bank chief Jean-Claude Trichet, who shocked markets last week with an announcement that ECB rates could rise in July, reiterated his comments on Monday. Other European central bankers weighed in on Tuesday. Erkki Liikaken, a Finnish member of the ECB's rate-setting Governing Council, said the eurozone's central bank was in a state of "heightened alertness."
Politicians joined the fray too ahead of a meeting in Japan where food and fuel price inflation is expected to dominate the debate among G8 finance ministers - from the United States, Japan, Germany, Britain, France, Italy, Canada and Russia.
"I think we need to take very seriously the concerns that have been expressed by the central bank (ECB)," German Deputy Finance Minister Thomas Mirow told reporters before heading to the G8 meeting in Osaka.
What was perhaps most striking from the Fed's Bernanke was the fact that he belittled the problems of the US economy hit by a housing market slump and kept the focus firmly on inflation, at a time when 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," he said. "The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations," he told a conference in Boston.
For his European counterpart Trichet, the message yet again was that everything would be done to stop the spurt in inflation turning into runaway inflation 1970s-style.
"I stick rigorously to what I said," he told a forum in Paris on Monday, referring to last Thursday's news conference when the ECB president announced that a rate hike was possible next month if not a certainty. "What I said was entirely inspired by this necessity to anchor inflation expectations," he added.
Financial markets continued to take seriously the threat of inflation, and official interest rate rises to combat it, even though the economic outlook is poor in the industrial world. World stock prices slid, major government bonds tumbled and the US dollar got a lift as the markets bought into the idea that that official interest rates could rise to head off inflation, or inflation expectations.
On the economic front, there was some respite, albeit in highly specific surveys that do not tell the full picture of what is happening to the whole economy. Machinery orders in Japan, a gauge of capital spending to come, rebounded in April after two months of declines, Japanese government data showed.
In Italy, revised data showed growth in the first quarter was marginally less weak than first estimated, at 0.5 percent quarter-on-quarter or what would equate to something like 2.0 percent in US measurement terms that rely on annualisation. Other official data there showed industry output in the eurozone's third-largest economy picked up more than expected by economists in April too.
While of limited significance, such data is not the kind that would make the ECB shift focus away from inflation, running at an all-time high of 3.6 percent year-on-year in the 15-nation euro currency zone.