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S. Balakrishnan

THE global economy is reaching the end of the road as far as interest rate cuts are concerned.

Starting from January 2001, the US Federal Reserve and guardian of monetary policy in the world's biggest economy has brought down its benchmark rate from 6.5 per cent to 1 per cent. The quantum and momentum of cuts accelerated considerably after 9/11, as the US central bank resorted to drastic measures to cheapen the cost of money and keep financial markets supplied with ample liquidity in a desperate attempt to restore confidence and get consumers and business moving.

Interest rates in Japan, the second largest economy in the world, were already close to zero when the Fed embarked on its rate-cutting spree.

The European Central Bank (ECB) was, as usual, slow to react, but had no choice but to lower rates as economic conditions in the Eurozone were none too sanguine.

Thus, we have unprecedentedly cheap money everywhere in the world.

Will these good times — for borrowers — last? All indicators point to central banks upping interest rates the next time they act.

Consider the evidence. The US economy is on the comeback trail with the latest estimates on GDP growth in 2003's third quarter being close to 7 per cent. This would be double that in the previous quarter.

Mr Ben Bernanke, one of the voting members of the Federal Open Markets Committee (FOMC), which sets interest rates in the US, even sees employment ticking higher in the near future. The fears that joblessness would persist or rise although the economy is growing seem to be dissipating.

Japan is coming out of its quagmire with its stock market rising as much as 30-40 per cent in recent months. Foreign money is pouring in and 10-year bond yields, after dropping to all-time lows of 0.4 per cent, have risen sharply to levels of 1.5 per cent. Euro-yen futures even point to a Bank of Japan tightening in about a year's time.

Elsewhere, the Bank of England and Reserve Bank of Australia could be the first to raise rates. They are seeing a housing boom and strong consumer spending.

The low inflation and extraordinarily low rates prevailing elsewhere in the world are deterring them from action at present. Only the ECB may have room and scope to reduce rates if the economic malaise in Euroland and the euro's appreciation continue.

All this does not mean that central banks will tighten on the morrow. In addition to data on economic activity, they are likely to watch the employment and inflation numbers carefully.

The approach is likely to be one of hastening slowly. But there is little doubt that we are at the bottom of the interest rate cycle.

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