THE EUROPEAN Central Bank kept benchmark interest rates unchanged at 4 per cent yesterday, as expected, as policymakers weigh the risk of high inflation against concerns about euro zone economic growth.

The ECB decision came as the International Monetary Fund said yesterday that inflation had re-emerged as a major threat to the world economy, in a stark warning that marked an abrupt change of tone from its emphasis on the risks to growth.

John Lipsky, IMF deputy managing director, said “inflation concerns have resurfaced after years of quiescence” due to soaring energy and food prices. Mr Lipsky said global growth was slowing but headline inflation was “accelerating”.

The IMF warning came as crude oil prices hit a record of almost $124 a barrel, up 99 per cent in the past 12 months, and customers scrambled to take out insurance against prices rising above $200 a barrel.

In an indication that the commodities boom may not be the bubble imagined, Mr Lipsky said the forces pushing prices up “appear to be fundamental in nature” – and these were being amplified by lower US interest rates and the dollar’s decline.

He was “optimistic” there would not be a repeat of the early 1970s, when increasing energy prices ushered in a period of rising inflation expectations and accelerating inflation, but he said this risk “cannot be discarded out of hand”.

Mr Lipsky said policymakers must respond aggressively to any sign of rising inflation expectations “lest the impressive gains in global stability attained in recent years be sacrificed”.

The IMF’s inflation warning was reinforced by European central bankers, as the European Central Bank and Bank of England left interest rates unchanged despite increasing signs of economic weakness.

The euro zone was “experiencing a rather protracted period of high annual rates of inflation”, ECB president Jean-Claude Trichet said. It was “imperative” that the households and companies did not think current inflation rates were normal and raise prices and wages accordingly.

The Bank of England rejected calls from representatives of the increasingly sickly housing market for lower interest rates, maintaining its rate at 5 per cent. The Monetary Policy Committee felt the increasing tension between rising inflation and lower growth did not allow it to cut rates twice in successive months.

The IMF warned in particular that food prices would remain high for the foreseeable future, stoking fears that the food crisis could trigger further unrest.

Consumer prices in the euro area rose 3.3 per cent in April from a year earlier after increasing 3.6 per cent in March, the most in almost 16 years.

The ECB, which aims to keep inflation just below 2 per cent, has left rates unchanged since June last year.

Mr Trichet said the governing council didn’t “draw particular conclusions from the fact that headline inflation came down”, and that the current interest rate level “will contribute” to bringing inflation back to the ECBs comfort zone. – (Additional reporting Financial Times service)