Don't underestimate the steely determination of central banks to wrestle down inflation.

It's easy to list reasons why the world's central bankers should go easy on tightening credit right now. The global economy is cooling, as underlined in the OECD's warning indicator for the G7 industrial nations, released on Friday, which slipped in June to 109.7, its lowest since January.

In the United States, the world's biggest economy, payrolls softened in July and unemployment rose, underscoring that a slowdown from above-trend growth is taking hold.

The slackening in the world economy comes at a delicate time for financial markets, already unnerved by escalating violence in the Middle East.

A Goldman Sachs survey has shown corporate business sentiment worsening for the first time in three years, consumer debt loads are huge, and oil prices could soar to $100 a barrel.

No wonder worries are mounting in markets that an economic upset could take hold by early next year, precisely when a round of credit tightening starts to bite.

This is a volatile environment for markets, said Lena Komileva, G7 market economist at Tullett Prebon in London.

These risks have fed the view that U.S. Federal Reserve will probably pause in its rate hikes next week for the first time in two years, raising questions over how quickly other major central banks will follow suit.

FALSE SECURITY

But market strategists caution that investors, lulled into false sense of security by four years of very low interest rates, may be underestimating how much further central banks have to go in raising rates.

Fed rates at 5.25 percent are only slightly restrictive, the euro-zone's 3 percent official money rates adjusted for inflation is still only 0.5 percent, and the Bank of Japan has only just begun tightening from zero.

With a global economy growing at a three-decade high of 5 percent this year and next, some analysts say more central bank tightening is inevitable.

Markets holding this persistent belief that the downside risks to growth are greater than the upside risks to inflation - come on! said Kit Juckes, FX strategist at RBS Financial Markets in London.

Markets are crazy if they don't understand there is more to come.

Analysts say underestimating inflationary risks ahead would be a mistake. Indeed, BNP Paribas economist Luigi Speranza said central banks may well find they already are behind the curve in fighting inflation.

Prospects of more rate tightening than bargained for jolted financial markets on Thursday. Bond yields jumped and stocks fell after the Bank of England's surprise rate hike to 4.75 percent, its first in a year.

Explaining its decision, the BoE cited firm growth, limited spare capacity, rapid growth in money and credit and prospects that inflation will remain above its 2 percent target for some while.

Similar arguments accompanied the European Central Bank's reasons for a fourth rate increase in nine months to 3 percent on Thursday. Many bond dealers were taken aback by President Jean-Claude Trichet's hawkish tone.

Trichet had no truck with suggestions that global or euro-zone growth was cooling and that the ECB risked tightening into a downturn. Instead, he said indicators were very impressive.

The Reserve Bank of Australia struck a similar note, following up its rate rise to 6 percent on Thursday with a report on Friday which revised up growth and inflation forecasts - a signal that a further rate hike could be in store.

Inflation