Bankers warn against interest rate hikes

EUROPEAN central bankers agitating for higher interest rates to quell inflation may be ignoring the lessons of Japan’s economic history.

As the European Central Bank and Bank of England consider tightening monetary policy, HSBC Holdings Plc and Fathom Financial Consulting warn officials risk misjudging the inflation threat and may end up hurting their recoveries. That is what has repeatedly happened in Japan in the past 25 years as policy makers constrained credit only to reverse within months when expansion faltered.

“The danger is of a policy mistake,” said Stephen King, HSBC’s chief economist and a former British Treasury official. “In an attempt to control inflation this year they could set the scene for more disappointing growth in the future as happened in Japan.”