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The Western world is gripped by a lack of confidence and a "feel-bad" factor that is unprecedented in recent economic history, the Bank for International Settlements said in its annual report Monday.

While growth in the U.S. remained steady and the recovery in Japan was gathering pace, consumption had been dampened by job insecurity and the need to trim fiscal deficits, the bank warned.Central bankers now needed to consider the risks of falling prices as well as inflation in setting their monetary policy, it said. "Price stability has been reached or nearly reached in a large number of countries. The forces bearing on the price level ... are now more balanced than they have been for some decades."

The report, issued as the world's central bankers gathered in Basle, Switzerland, for the BIS annual general meeting, marks a change of tone for the group.

In recent years the BIS, which acts as a highly influential meeting point for the world's central banks, has emphasized the need to combat inflation at all costs and limited its analysis of labor market problems. But with central banks having been accused in some countries of curbing growth in their zeal to control inflation, the BIS emphasized that monetary policy could be both expansionary and restrictive - and called on policy makers to "resist both inflation and deflation."

This subtle change in tone may fuel market speculation that central banks might be slower to raise interest rates again in the next economic cycle. However, the BIS denied that it was encouraging lax monetary policy, while bank president Wim Duisenberg warned that the "continuing buoyancy of the U.S. economy" might pose an inflation risk in the future.

Nevertheless, the bank admitted that some new deflationary factors were emerging in the world - namely, increased global competition, wage flexibility and continuing attempts to cut fiscal deficits.

With these factors partly to blame for the "feel-bad" problem, the BIS acknowledged that central bankers could do little themselves to boost sentiment. In the longer term, however, it argued that consumer confidence should rebound.

Although the timing of the upturn in Europe was still uncertain, growth elsewhere in the world was healthy and world markets were unlikely to trigger any recessionary jolts.

In particular, low inflation meant that "the pattern of 1994" in the bond markets was unlikely to be repeated this year, Duisenberg said. "Major financial markets have been relatively calm."

The financial system had weathered the 1994 Mexican crisis well but the BIS insisted that bankers still needed to step up their surveillance of the financial system and collect more information about the global derivatives market, which it recently valued last year at some $40.6 trillion.

It also warned the banking sector of "serious challenges" that would force widespread restructuring, mergers and job losses. Branch networks would probably shrink, many banks would be merged and the total number of private banks operating would need to fall considerably.

Although Anglo-Saxon and Nordic countries had already sharply cut jobs, such countries as Japan, Germany and Italy had barely made any headway yet in trimming their staff - which implied that job cuts would be needed in those countries soon.

(Distributed by Scripps Howard News Service.)