Central banks in the US and Europe have sent conflicting signals on interest rates. While Mr Alan Greenspan, the Federal Reserve Board chairman, was playing down investor fears, the European Central Bank (ECB) sounded the alarm on inflation, unsettling bond markets and raising fears that it may be more aggressive than had previously been expected in lifting rates.
Mr Jean Claude Trichet, ECB president, said the bank would be "very vigilant" about "second round" inflationary effects following the surge in oil prices and warned that inflation expectations were on the rise.
His comments followed Monday's bigger-than-expected jump in French inflation to 2.8 per cent in May from 2.4 per cent in April and came ahead of today's final data on euro zone consumer prices for May.
The data are expected to confirm euro-zone inflation was 2.5 per cent in May, its highest level for two years. The data could also show a slight rise in core inflation, which excludes food, energy, tobacco and alcohol prices.
Mr Trichet's comments helped bolster the swing in market sentiment that barely a month ago was still predicting a rate cut.
Financial markets are now pricing in at least a quarter-point rise in the ECB's key interest rate, currently 2 per cent, by September.
In contrast, Mr Alan Greenspan sounded a reassuring note on the outlook for inflation and interest rates, wrong-footing traders anticipating faster rate rises. However Mr Trichet has raised fears that euro-zone rate rises could be more rapid than anticipated.
Appearing before the Senate Banking Committee to confirm his appointment for a fifth term, Mr Greenspan said: "Inflation pressures are not likely to be a serious concern".
This means that the Fed can raise interest rates during the quarters ahead from a level it now considers to be unnecessarily low at a pace that is "very likely to be measured".
Mr Greenspan's comments came as data showed that core inflation was softer than expected in May. Although the consumer price index rose by a larger-than-forecast 0.6 per cent, the more closely watched core rate, excluding food and energy prices, climbed by just 0.2 per cent.
