Bank for International Settlements headquarters, Basel, Switzerland.

The performance of the global economy over the last few years has been extraordinary, notes the Bank for International Settlements (BIS) in its 77th Annual Report, released on Sunday.

Established in 1930, the BIS, which is often termed the central bank of central banks, is the world's oldest international financial organisation.

Real growth has been maintained around levels that are among the highest recorded in the postwar period, and many of the world's poorest countries have shared in this growing prosperity. Underlying inflation levels have generally remained subdued, despite significant upward shocks to most commodity prices. Real interest rates and risk premia have been uncharacteristically low across the board. Record global trade imbalances have been easily financed and exchange rates have been generally stable. According to the BIS Annual Report, "The combination of developments is so extraordinary that it must raise questions about the source and, closely related, the sustainability of all this good fortune."

The International Monetary Fund forecasts global economic growth of 4.9 percent this year after 5.4 percent growth in 2006. That will mark five consecutive years of growth above 4 percent, the longest streak since the early 1970s.

``It is not clear whether inflationary pressures have been contained,'' the BIS said in its annual report, published yesterday. ``Economic slack has more or less been used up in the major advanced economies'' and ``vanishing slack might have increased inflationary risks.''

Central banks may also have ignited inflation by keeping borrowing costs ``so low for so long,'' the BIS said. In the period under review, to May 2007, interest rates ``remained highly accommodative in the industrial countries'' after being raised only ``moderately.''

Jean-Pierre Roth, Chairman of the BIS Board of Directors, chaired the Bank's Annual General Meeting, held yesterday in Basel, Switzerland. Representatives from more than 120 central banks and international institutions attended.

Speaking on Sunday, BIS General Manager Malcolm Knight highlighted the uncertainties currently facing markets and policymakers. They include the possible resurgence of global inflation, the evolution of current account imbalances, and potential vulnerabilities in financial markets and financial institutions. He noted that behind each set of concerns lurks the common factor of highly accommodative financial conditions.

Knght said that a further tightening of monetary policy might then be needed, as well as action to reduce still high government deficits and debt in many countries. Countries that, in principle, have floating exchange rate regimes should allow their currencies to adjust more freely. Regarding financial sector developments, there could perhaps be more scepticism about the purported benefits of having new players, new instruments and new business models searching aggressively for increased yield.

``Inflationary pressures might turn out to be more significant than anticipated,'' Knight told a press conference. ``Authorities should continue gradually to normalize the level of policy interest rates'' as the global economy extends what ``may well go down in history as a `golden age.'''

The BIS reported a balance sheet total of SDR 270.9 billion (USD 410 billion) at end-March 2007. Nearly SDR 222 billion (USD 336 billion) of official foreign currency reserves are deposited with the BIS, around 6% of the world's total. The Bank also reported a net profit of SDR 639.4 million (USD 968.7 million) for last year. The Bank's 55 shareholding central banks will receive a full dividend of SDR 255 per share, a 4.1% increase over that for the previous financial year.