WASHINGTON -- Higher inflation will push up interest rates, but a growing economy will fuel loan demand nonetheless, a panel of bank economists said on Wednesday.

"With inflation edging higher and economic growth close to 3%, short-term interest rates are expected to begin rising by the end of the year," said Stuart G. Hoffman, chairman of the American Bankers Association Economic Advisory Committee.

"Bond yields and mortgage rates will also edge higher, but to a somewhat lesser extent than short-term interest rates," he added.

Loan Demand Can Be Met

The committee said the industry's return to health will enable it to meet demand for credit that is expected as the economy continues to grow moderately.

Committee members pointed to the industry's improved earnings, large increases in bank capital, and the decline in nonperforming loans as encouraging signs, but said heavy regulation hurts lending activity.

"Banks are ready, willing, and able to meet a higher credit demand," said Mr. Hoffman, who is senior vice president and chief economist of PNC Bank Corp. in Pittsburgh.

"Yet banks continue to face a high cost of regulation," he added. "A positive approach by the regulators and Congress could help alleviate unnecessary barriers to the lending process."

Inflation Prediction

The higher inflation rates will be brought on by higher taxes, costs to business, and limited price flexibility. However, Mr. Hoffman predicted that inflation will stay at or below 3.5% through 1994.

"The committee was impressed that there weren't any looming, dark clouds on the inflationary horizon," he said.

The panel said the economy is on track to post moderate economic growth through the end of 1994, projecting increases in real gross domestic product of 2.4% this year and 2.9% next year. That contrasts with an economy that was barely moving at all in the first quarter of this year.

"Three serious vulnerabilities are standing in the way of more robust economic growth," said Mr. Hoffman. "Higher taxes brought on by the budget bill, uncertainties associated with the cost to business of health care reform, and the risk that the poor economic performance of our trading partners will [hurt] U.S. exports."

On deficit cuts, the committee said that meaningful reductions are neccessary to reassure the financial markets.

"We are concerned that a budget program that makes most of its spending cuts in the later years may fail to achieve the desired amount of deficit reduction," said Mr. Hoffman.

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