Since September last year, US Federal Reserve boss Ben Bernanke has repeatedly slashed interest rates to counter the global credit crisis and the fear and suspicion that continues to haunt financial markets. But now it seems the cutting strategy is over.
As Mr Bernanke put it overnight, the Fed "will strongly resist an erosion of longer-term inflation expectations".
It was an unambiguous message to economists and market watchers around the world, such as James Shugg, a senior economist with Westpac in London.
"We've seen global markets shift very much in the last day or so to defer the view that the next move in interest rates, rather than being down in many parts of the world, it's more likely to be up," Mr Shugg said.
He says Mr Bernanke's renewed inflation warning confirms that when the world's most powerful central banker speaks, the world reacts.
"Other Fed officials come out saying that they don't think that interest rates should fall any further in America, they're going to do all they can to fight inflation," he said.
"The governor of the Bank of England admitted today that the UK economy is slowing but that there is still an inflation problem there and certainly the market has taken from that there's no scope for any near-term cuts in UK interest rates.
"Then the big surprise was the Bank of Canada, everyone expected them to cut interest rates today, they came out and said no we're not going to cut interest rates because we're worried about inflation."
Investors seemed to ignore Mr Bernanke's downplaying of the surge in US unemployment and comments that the risk of a major downturn had receded.
Instead, his hawkish stance on inflation gave market watchers, such as Scott Brown of Raymond James and Associates in New York, just one conclusion to draw.
"Short-term interest rates are likely to rise sooner rather than later," Mr Brown said.
"I don't think that's this month or perhaps next meeting, but perhaps later this year, or early next year."
He says spiralling food and oil prices are feeding into inflation, in an unpredictable and volatile way.
"The Fed is in a tough position now as well because the higher oil prices do imply a serious restraint on growth," he said.
"Now should the Fed keep rates steady or cut rates in the months ahead to offset that economic drag, they would end up accommodating the higher inflation.
"So it's important for the Fed to resist it. But again this is, I think, really a global message we're getting from central bankers around the world now."
The challenge is even tougher given warnings from economists that the world should prepare for an era of high single digit or double digit inflation, brought on by booming commodity prices.
In China for example, inflation is running at 7.7 per cent and even that's down slightly from a 12-year high of 8.5 per cent set in April. Another factor is the setting of inflation target bands.
There isn't one in the United States, but Australia's central bank is currently pulling inflation back into a comfort zone of 2 to 3 per cent, using rate hikes as the painful mechanism.
But Mr Shugg says while Australians are hurting from higher rates, it could be worse.
"Now in Australia we've got the lucky position where we're the beneficiary of higher commodity prices, in terms of the Australian mining companies do really well and the Government does well in terms of the tax receipts it gets, and they can then cut income tax for Australians," he said.
"But in places like the UK where they have to pay the higher food and energy prices but they don't actually produce any of the stuff, it's a real problem. The economy is sliding into a period of recession, yet interest rates need to go up."
The prospect of higher rates in the United States put Wall Street into a wobble this morning, with the Dow Jones industrial average closing slightly higher.
But in one piece of positive news, the renewed hawkish mood pushed the price of crude oil down to $US131 a barrel.
And the International Energy Agency released an optimistic prediction that a forced slowing of demand for oil will see the crude price fall to below $US100 a barrel within two years.
Based on a report by business editor Peter Ryan for The World Today
Central banks turn focus on inflation
Since September last year, US Federal Reserve boss Ben Bernanke has repeatedly slashed interest rates to counter the global credit crisis and the fear and suspicion that continues to haunt financial markets. But now it seems the cutting strategy is over.
As Mr Bernanke put it overnight, the Fed "will strongly resist an erosion of longer-term inflation expectations".
It was an unambiguous message to economists and market watchers around the world, such as James Shugg, a senior economist with Westpac in London.
"We've seen global markets shift very much in the last day or so to defer the view that the next move in interest rates, rather than being down in many parts of the world, it's more likely to be up," Mr Shugg said.
He says Mr Bernanke's renewed inflation warning confirms that when the world's most powerful central banker speaks, the world reacts.
"Other Fed officials come out saying that they don't think that interest rates should fall any further in America, they're going to do all they can to fight inflation," he said.
"The governor of the Bank of England admitted today that the UK economy is slowing but that there is still an inflation problem there and certainly the market has taken from that there's no scope for any near-term cuts in UK interest rates.
"Then the big surprise was the Bank of Canada, everyone expected them to cut interest rates today, they came out and said no we're not going to cut interest rates because we're worried about inflation."
Investors seemed to ignore Mr Bernanke's downplaying of the surge in US unemployment and comments that the risk of a major downturn had receded.
Instead, his hawkish stance on inflation gave market watchers, such as Scott Brown of Raymond James and Associates in New York, just one conclusion to draw.
"Short-term interest rates are likely to rise sooner rather than later," Mr Brown said.
"I don't think that's this month or perhaps next meeting, but perhaps later this year, or early next year."
He says spiralling food and oil prices are feeding into inflation, in an unpredictable and volatile way.
"The Fed is in a tough position now as well because the higher oil prices do imply a serious restraint on growth," he said.
"Now should the Fed keep rates steady or cut rates in the months ahead to offset that economic drag, they would end up accommodating the higher inflation.
"So it's important for the Fed to resist it. But again this is, I think, really a global message we're getting from central bankers around the world now."
The challenge is even tougher given warnings from economists that the world should prepare for an era of high single digit or double digit inflation, brought on by booming commodity prices.
In China for example, inflation is running at 7.7 per cent and even that's down slightly from a 12-year high of 8.5 per cent set in April. Another factor is the setting of inflation target bands.
There isn't one in the United States, but Australia's central bank is currently pulling inflation back into a comfort zone of 2 to 3 per cent, using rate hikes as the painful mechanism.
But Mr Shugg says while Australians are hurting from higher rates, it could be worse.
"Now in Australia we've got the lucky position where we're the beneficiary of higher commodity prices, in terms of the Australian mining companies do really well and the Government does well in terms of the tax receipts it gets, and they can then cut income tax for Australians," he said.
"But in places like the UK where they have to pay the higher food and energy prices but they don't actually produce any of the stuff, it's a real problem. The economy is sliding into a period of recession, yet interest rates need to go up."
The prospect of higher rates in the United States put Wall Street into a wobble this morning, with the Dow Jones industrial average closing slightly higher.
But in one piece of positive news, the renewed hawkish mood pushed the price of crude oil down to $US131 a barrel.
And the International Energy Agency released an optimistic prediction that a forced slowing of demand for oil will see the crude price fall to below $US100 a barrel within two years.
Based on a report by business editor Peter Ryan for The World Today
