The Globe and Mail

Inflation expectations hit a record high in Britain in May and jumped to a 15-year high in Australia as the European Central Bank reiterated its state of high alert over prices, adding to the prospects of a rise in interest rates globally.

However, South Korea's central bank skipped a rate rise Thursday, leaving rates unchanged instead to monitor price pressure and growth in Asia's fourth-largest economy even with inflation at a seven-year high.

The decision by the Bank of Korea underlines the challenge for central banks worldwide to balance the need to tackle inflation without posing a risk to economic growth.

The Bank of Japan is widely expected to follow the Bank of Korea's lead by leaving its interest rates steady when it announces the outcome of a policy review Friday, while China posted its first break in a year to soaring inflation.

China's annual consumer inflation dropped back to 7.7 per cent in May from 8.5 per cent, bucking the global trend of increasing price pressures, as a year-long surge in food prices ebbed.

While the drop will provide some relief to Chinese policy makers who have declared inflation their main economic challenge, economists ruled out a softening of the central bank's tight policy.

They said strong money supply data for May, also published Thursday, and producer price inflation at a four-year high of 8.2 per cent suggest more price pressures in the pipeline.

Some economists trace China's inflation not to high commodity prices but to loose monetary policy as the central bank struggles to mop up cash pouring in from its huge trade surplus.

Annual growth in the broad M2 measure of money supply jumped to 18.1 per cent in May, much faster than expected, from 16.9 per cent in April, the People's Bank of China said Thursday.

David Cohen with Action Economics in Singapore said the combination of brisk money growth, still-high inflation and Wednesday's robust export figures would set lights flashing at the central bank.

“It leaves a picture suggesting that the PBOC will be taking further tightening steps,” Mr. Cohen said.

Opinions, though, vary widely. JP Morgan's Qian Wang, in a report to clients, forecast three more Chinese rate rises this year, but Wang Qing at Morgan Stanley said he expected the central bank to stand pat as exports slow.

Policy makers globally have raised the alarm over inflation in recent weeks as commodities prices, such as oil and corn, rose to fresh record highs.

“The window of opportunity is going to close in the coming quarters when growth momentum starts to slow as the second order effects of inflation kick in,” said Leong Wai Jo, an economist at Barclays Capital in Singapore. “But for now, the window of opportunity is still open for central banks to curb inflation.”

Britons' expectations of future inflation surged to a record high of 4.3 per cent in May, well above the actual rate of 3 per cent, a survey by the Bank of England showed Thursday.

The central bank's quarterly survey showed median expectations for the rate of inflation over the coming year had jumped markedly from the previous series high of 3.3 per cent in February.

Britons' perception of the current rate of inflation spiked to a record 4.9 per cent in May from 3.9 per cent in February, the survey showed.

The figures are likely to encourage more investors to bet on higher borrowing costs despite the prospect of weaker economic growth as central bankers around the world contend with soaring fuel and food prices.

Australian consumer inflation expectations climbed in June to their highest in 15 years, posing a problem for the country's central bank, which has raised interest rates to 7.25 per cent to head off such an increase.

The Reserve Bank of Australia, which only last week warned that it could have to tighten again should inflation expectations begin to escalate, has already raised rates twice this year.

The European Central Bank, meanwhile, said in its monthly bulletin it was on high alert for inflation risks and is prepared to act in a firm and timely way to head off a wage-price spiral.

The June bulletin expectedly echoed what ECB President Jean-Claude Trichet said about the inflation threat last week after the ECB left interest rates unchanged at 4 per cent.

India's central bank late Wednesday lifted its key lending rate for the first time in more than a year, slightly earlier than expected, to stem quickening inflation. It raised the repo rate to 8 per cent from 7.75 per cent.

Japan and Korea seem to be exceptions to the rule with their bias for steadier rate policies.

“The Koreans are in the minority right now. Many Asian banks are shifting to a tightening stance because inflation is higher here than anywhere else and growth has been stronger,” said Action Economics' Cohen.

“Perhaps only Japan is going to be patient and will be in no hurry to change its policy.”

Reflecting concern about the high levels of inflation in Asia, HSBC said in a report that investors should have no exposure to emerging Asian shares.

“Inflation looks a very real problem in Asia and the risk, as we've said before, is that investors lose faith in the region's currencies,” HSBC strategists wrote in a June 11 report.