Central banks should keep raising rates: BIS's Knight

The global economy is poised for a fifth straight year of growth above 4 percent, but risks remain and have as their common thread the highly accommodative financial conditions that have buoyed it in recent years, BIS General Manager Malcolm Knight said.

Tighter rates would have the added benefit of reining in financial markets, which Knight said were still loaded with risk, possibly sowing the seeds for a nasty correction in assets and currencies.

"Financial conditions are still accommodative, access to credit remains easy and credit spreads are at record lows," Knight said after talks with about 250 central bankers at the BIS annual general meeting.

"Containing inflationary pressures seems to require further tightening in most jurisdictions, as is expected by financial markets."

Central banks are concerned about excess liquidity in the face of strengthening growth, pushing up borrowing costs around the world. The Bank of England is seen hiking again in July or August, the Bank of Japan in August, the European Central Bank is expected to raise rates in September and markets have now abandoned hopes of a cut in U.S. interest rates.

In its annual report, also released on Sunday, the BIS cited a resurgence in inflation, the chance of a sharper slowdown in the United States and financial market vulnerabilities as key risks to future global prosperity.

Financial markets may have become "irrationally exuberant", it said, borrowing a phrase used by former U.S. Federal Reserve Chairman Alan Greenspan to describe the stock market boom of the 1990s.

Knight said although real risk premiums had gone up in recent weeks as bond prices tumbled, they had come from very low levels and investors were still accepting a fair amount of risk.

"The robust performance of the world economy can in part justify such vibrancy," he said in his speech to the AGM.