THE world’s leading central bankers sounded a renewed alert over rising inflationary dangers yesterday and issued a warning that they may need to raise interest rates more aggressively to counter increasing price pressures.

The sharp reminder to markets that central banks are on their guard against inflation came after three days of talks among their governors and senior officials at the annual meeting of the Bank for International Settlements (BIS) in Basle.

Malcolm Knight, the BIS general manager, conceded that fresh rate rises could jolt financial markets, so central banks would have to remain “pragmatic”. However, he made clear that there was a consensus that tougher action was on the agenda, although it was “not clear how far policy rates will need to rise”.

Mr Knight said: “Inflation risks are now seen to be greater than they have been for some time. At some point, central banks may well have to act more forcefully on policy rates than they have needed to in the past few years.” he added that while “most observers still expect inflation to remain low”, central banks had become anxious that expectations for future inflation among firms and households had risen. “Some early signs that inflation expectations have edged higher . . . are worrying,” he said.

The warning from the BIS, regarded as “the central bankers’ central bank”, came amid jitters in markets worldwide ahead of another expected increase in US rates on Thursday.

Mr Knight said that the Fed faced a difficult task in tackling conflicting pressures: “We know the US is slowing modestly, but there are significant inflationary pressures coming from commodity markets and [manufacturers’] input prices.”

The BIS chief echoed other policymakers in playing down the recent turmoil that has shaken share prices worldwide. “It appears to me that what we are seeing is a generalised increase in the risk aversion of asset-holders,” he said.

“That in and of itself is not an unhealthy phenomenon because we have been saying for some time that there was an underpricing of risk.”

Despite heightened concerns over inflationary risks at a time when oil prices have surged to record levels and spare capacity in the global economy is shrinking, the BIS noted that consensus expectations for this year remained rosy, with world growth again set to be above 4 per cent. “The best bet for next year is that strong, noninflationary growth will continue,” it said.

However, it used its annual report to express worries over threats to that outlook, from factors such as avian flu to global economic imbalances, as well as over the reliance on central banks’ use of interest rates to fend these off. It said that governments could help by raising tax or curbing spending: “The burden placed on monetary policy, and the associated risks, could be reduced by concurrent fiscal tightening.”

The BIS noted that America’s net income from its assets overseas had turned negative in both the second and final quarters of last year. This suggested that the US current account deficit, at 6.4 per cent of GDP, may have reached the point where it could be increasingly hard to finance. Washington should take steps to curb the US trade deficit, the BIS said. It also highlighted the growing importance of “petrodollars” in financing the deficit, with oil-exporting countries channelling at least $200 billion into US securities between June 2002 and June 2005. The true figure was probably much higher, the BIS said.