European inflation broke above the ECB’s 2% threshold in December rising to 2.4% in February, while the British CPI growth accelerated last month to 4.4%, twice higher the 2% BoE target level. As a result, the European Central Bank announced about its readiness to raise interest rates and more and more members of the Bank of England’s MPC call for monetary tightening. Analysts at HSBC, however, claim that the central banks should take into account Japan’s unsuccessful experience in this field.

In their view, the inflation threat may misguide the European monetary authorities and, as a result, the region’s economy may suffer like Japan did in the past quarter century. At the beginning of 1990s, the Bank of Japan increased its key rate in more than 2 times to 6% as the Gulf War pushed oil prices and inflation to 4.%. However, when inflation was soon eliminated the central bank has to cut back the rate to less than 2% by the end of 1993.

According to HSBC, oil-price surge can create sometimes more deflationary than inflationary risks as it is squeezing spending power. The specialists warn that that’s what may be currently happening in Europe as crude oil approached maximum in more than 2 years above $100 a barrel.

HSBC notes that among the longer term costs of the monetary policy mistake there are stagnation, deflation and economic underperformance. To receive evidence one must just look at Japan: the country has to keep rates at the record low, while its debt is twice the size of the nation’s economy.