MercoPress. South Atlantic News Agency

Central bankers' dilemma: liquidity or inflation risks

European Central Bank (ECB) chief Jean-Claude Trichet is “very satisfied” with central banks' coordinated action to help banks hit by the credit crunch. The US Federal Reserve, the ECB and central banks from the UK, Canada and Switzerland injected billions to calm money markets in December.

Mr Trichet was speaking in Basel in his capacity as the current head of the G-10 group of central bank governors. He said global economic growth was "robust" but inflation risks remain. "We see growth continuing at a pace which is quite robust even if there is a little bit of slowing down." Mr Trichet stressed that there are still real risks to the global economy. "To sum up our analysis, I would say no complacency as regards to inflation and no complacency with regards to the question of the significant correction in the markets," he said. Central banks are faced with the dilemma of wanting to cut interest rates to spur growth but they fear lower rates will ignite inflation, already pressured by factors such as the rising cost of oil. The ECB meets on Thursday to decide whether to cut interest rates. It has so far resisted the temptation to cut the cost of borrowing, unlike the Federal Reserve, Bank of England and Bank of Canada. Five central banks teamed up to make cash available in December to private banks hit by the credit crunch. As a result, the rates that banks charge to lend to each other in the short-term fell substantially. "The measures that have been taken by various central banks to cope with the tensions on the money markets proved efficient technically" Mr Trichet said. "We certainly were reassured to see that the end of the year had passed in a way which had been relatively smooth". The credit crunch stemmed from record default levels in US sub-prime mortgages. Many banks worldwide held debt based on US mortgages, some of them of questionable value. This created uncertainty as how much money they could afford to lend to other banks and also about which banks were creditworthy. The G-10 central bankers have been meeting as part of the Bank for International Settlements monthly meeting in Basel, Switzerland. Believe it or not: in 2008 Brits will be richer than US citizens United Kingdom living standards are set to overtake those in the United States this year for the first time since the 19th century, research has claimed. The UK's GDP is expected to rise to £23,500 per person during 2008, £250 more than the £23,250 GDP per head predicted for Americans, according to Oxford Economics. Britons are also expected to enjoy higher living standards than both the Germans and the French, with GDP per head in the UK around 8% higher than in both of these countries, where it is expected to be £21,665 and £21,700 respectively. But despite the UK overtaking the US in terms of GDP per head, it does not mean the average Briton will suddenly feel wealthier than their American counterpart. Americans are still likely to feel richer because goods and services are cheaper in the US, meaning they have stronger purchasing power. The UK has enjoyed strong economic growth during the past 15 years and this has helped it overtake the US in terms of living standards. Adrian Cooper, managing director of Oxford Economics, said: "The last 15 years have seen a dramatic change in the UK's economic performance and its position in the world economy. "No longer are we the 'sick man of Europe'. Not only have we left Germany and France in our wake, our calculations reveals that UK living standards are now outstripping those of the US." The group said the rise in living standards was part of a long-term trend, with the UK seeing substantial relative improvements since the early 1990s. It said in 1993, following the last major recession and the UK's ejection from the ERM, GDP per head in the UK was 34% lower than in the US, 33% lower than in Germany and 26% lower than in France. The increase in the UK's GDP per head relative to these countries in a large part reflects the long period of sustained economic growth that the UK has enjoyed since 1993.