U.S. Federal Reserve chairman Alan Greenspan said today that interest rates south of the border must go up to keep a lid on inflation.

However, Greenspan gave no hints on when an interest rate hike will be necessary.

“As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building,” he said in a statement before a U.S. Congressional economic committee

“But the Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome,” Greenspan added.

While inflation has remained benign, U.S. interest rates have remained at 1% — a 46-year-low — since June. Most economists don’t see the Fed boosting rates at its next meeting on May 4.

Speaking before members of the U.S. Senate and the House of Representatives, the Fed boss said prospects for economic growth are good.

The pace of hiring, which has lagged the economic recovery in the U.S., “should pick up on a more sustained basis, bringing with it larger persistent increases in net employment than those prevailing until recently,” Greenspan said.

Economists parsing Greenspan’s testimony, gave different readings on when they expect interest rates to start climbing.

Bank of Montreal says that Greenspan affirmed that current historically low interest rates will need to rise in the future, though not necessarily in the months ahead. He suggested that the deflation threat has disappeared, but inflation is contained too. “The Chairman’s comments suggest that, at the next policy meeting on May 4, the Fed will revert to a neutral bias regarding the inflation outlook and will abandon its pledge to remain ‘patient in removing its policy accommodation.’ However, no rate increase is expected,” BMO says.

BMO Nesbitt Burns takes it a step further, suggesting that Greenspan’s comments indicate that the bias has already been moved to neutral. “While the bond market has thus far breathed a sigh of relief with Alan Greenspan’s prepared testimony before the Joint Economic Committee of Congress, he nonetheless signalled that the Fed has shifted its bias to neutral on the outlook for inflation.”

“Greenspan signalled that he will not take action immediately, but he will begin raising interest rates when productivity growth appears to be slowing,” Nesbitt notes. “The likelihood is that will be this year. The Fed’s intention is to raise rates gradually in an effort to maintain financial market stability. He and other Fed officials are preparing the market for just that. They have not set a date for the first rate hike, so don’t read too much into their statements. They will respond to the incoming data, and so will the markets.”

“We continue to believe that the first rate hike will come this year before the November presidential election as the Fed begins to take its foot off the accelerator in light of a stable price environment and diminishing excess capacity,” predicts RBC Financial.

TD Bank says that it is expecting the Fed to start raising interest rates in August of this year. “And, although the common view on the street is that the Bank of Canada will wait until January 2005 before pulling the trigger, October 2004 seems like a better bet,” it says.