INFLATION

Central banks probably will halt their monetary tightening campaign and the Federal Reserve may start cutting interest rates to ward off a global credit crunch, financial market dealers said on Friday.

Tighter credit, broad deterioration in the housing market and skittish consumer spending will lead to a slower U.S. economy than earlier estimated, according to the most closely watched forecast by U.S. economists.

Federal Reserve Bank of Minneapolis President Gary Stern, playing down jitters in global money markets, said on Thursday that subprime mortgage problems were limited in scope and the Fed routinely injects substantial liquidity into the banking system.

Mexican consumer prices jumped 0.42 percent in July, accelerating from June and pushing 12-month inflation above the 4-percent limit the central bank says is acceptable.

Canadian housing starts fell 4.3 percent in July to miss estimates while new home prices rose at a slower pace than in the prior month, suggesting a steady cooling of the domestic housing market.

Korea’s central bank raised a key interest rate by 0.25 percent to 5 percent on Thursday, the highest level in six years.

The yen fell across the board on Wednesday after a Federal Reserve statement cooled expectations for a near-term U.S. interest rate cut and boosted stocks and other riskier assets.

Productivity climbed at a slower-than-expected pace in the second quarter and has gained only slightly over the past year, keeping alive the risk that rising wages could push up inflation.

The Federal Reserve on Tuesday held benchmark U.S. interest rates steady and said that while tightening credit conditions had increased downside risks facing the economy, inflation was still its main concern. The decision by the central bank's Federal Open Market Committee kept the overnight federal funds rate at 5.25 percent, the level it hit in June 2006 after 17 straight quarter-percentage point increases.

The U.S. Federal Reserve is expected to hold overnight interest rates steady and reaffirm concerns about inflation at its meeting on Tuesday, but may also acknowledge emerging signs of economic weakness. Fed policy makers began meeting this morning against a backdrop of unsettled financial markets and are expected to announce their decision on interest rates at 2:15 EDT.

The dollar crept lower against the yen on Tuesday as investors waited for a Federal Reserve statement that will be scrutinized for any signs of a shift in the central bank's vigilant stance on inflation.

Argentina's July inflation came in at a lower-than-expected 0.5 percent, the government said on Monday, as official consumer price data again aroused analysts' suspicion of tampering.

U.S. Federal Reserve officials meeting on Tuesday will grapple with how turmoil in financial markets and tighter credit may damage the economy, and could hint at some concern growth could falter.

Employers expanded their payrolls in July at the slowest pace since February and the jobless rate ticked up to its highest since the start of the year, a government report showed on Friday. In another sign of slowing growth, the Institute for Supply Management reported signs of a weakening service sector as its index of July activity fell to 55.8 from 60.7 in June. Any reading over 50 indicates growth.

The euro briefly edged up against the dollar on Thursday after the European Central Bank president said 'strong vigilance' was needed to stem inflation risks, signaling a possible September rate hike.

Consumer confidence rose to a nearly six-year high in July as consumers perceived improvements in business conditions and the labor market, a report said on Tuesday.

Consumer sentiment softened slightly in late July from earlier in the month, but optimism about job and income prospects kept it at its highest reading since February, a survey showed on Friday.

India's success in trimming its fiscal deficit has surprised even itself but progress in the next two years will be harder as dizzying growth slows and pressure for populist spending rises before elections.

Provincial governors of China's central bank have given it high marks for its use of various tools in the first half of the year to rein in the world's fastest-growing major economy.

Move is one in a series of tightening steps aimed at keeping inflation under control.

The dollar eased slightly against most currencies on Thursday over concerns about the health of U.S housing market as investors eye the next Federal Reserve rate move.