The global pendulum has swung toward higher interest rates but the move to costlier credit world-wide is proving less than smooth, and it looks as if cheap money will remain readily available for much of 2005. Major central banks, anxious to prevent an inflationary spurt, are drawing the curtain upon an extraordinary era of very cheap money.
The US Federal Reserve is on a steady credit tightening path. But in the euro zone - the world's second largest economic bloc where official money costs only 2 percent - the European Central Bank looks unlikely to start closing the taps before this summer, say analysts.
As for the Bank of Japan, it has yet to lay out any strategy for exiting its policy of zero interest rates.
"The case is there for a global rate tightening cycle. But everyone is slightly differentiated in pace. It is a matter of degree rather than direction," said Christel Aranda-Hassel, European economist for Credit Suisse First Boston in London.
The Federal Reserve, after tightening credit five times since last June, is expected to deliver another increase when its rate meeting concludes later on Wednesday.
The ECB may also signal at its meeting on Thursday that it leans towards a rate rise. But despite improving leading economic indicators, it will await convincing evidence that solid growth is in firmly place before acting.
"It may still argue for a little patience," said Thomas Mayer, chief European economist at Deutsche Bank in London.
The timing and speed of further rate tightening by other major central banks around the world, though, is far from clear.
The Bank of England is taking a breather after a bout of rate tightening in 2004, and 22 out of 47 economists surveyed by Reuters this week said the U.K. rate tightening has already peaked at 4.75 percent.
The Bank of Canada has also paused after two rate hikes in September and October. So too has the Swiss National Bank.
So even though the global economy posted its best performance in three decades last year, growing at roughly a 5 percent annual pace, rate tightening looks set to remain modest, both in scale and scope.
In a Reuters survey conducted in January, analysts predicted official rates in the Group of Seven top industrial nations would reach an average level of 2.90 percent by the end of 2005. This is just over half a percentage point above the mean 2.30 percent at the end of last year.
That would be only a slightly faster pace than the 0.40 percentage points of tightening delivered in 2004 for the G7 on average. And some economists are not convinced the steady path toward higher rates in leading economies will remain in tact.
"You could start seeing a significant decoupling of the rate cycle in the world right now," said Robert Lind, economist at ABN Amro in London.
These issues will be in the spotlight when central bankers and finance ministers from the G7 countries meet in London on Friday and Saturday to discuss the global economic outlook.
The ECB, for one, is likely to face pressure from the United States and possibly from politicians in Germany and Italy to stay its hand on rate increases, given the 12-nation euro zone's lacklustre economic performance. Growth is seen at about 1.8 percent on average this year.
Indeed, a German government official told Reuters on Thursday that the International Monetary Fund has doubts about the strength of European economic growth this year.
That could give firepower to US officials at the G7 to urge the ECB to stick with its low 2 percent rates to bolster weak domestic demand and help rebalance global growth.
However, European economists said a recent spate of encouraging data for the bloc - in January the PMI manufacturing index rose for the second consecutive month and Germany's Ifo business sentiment index hit an 11-month high - could bolster the case for the ECB to hike rates sooner than markets think.
"For many months now the ECB has had a de facto tightening bias. Therefore the bank has started to prepare the ground for a rate tightening. The fact that they have not delivered one yet is because the forward indicators forced them to revise down their growth outlook (in December)," said Joerg Kraemer, economist at HVB in Munich. "That outlook has started to change," said Kraemer, who expects an ECB tightening in May.
Deutsche Bank's Mayer agreed. "A rate hike is not in the pipeline, or just around the corner. But it is probably nearer than we thought a month ago."
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