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Interest rate cycle: present vs past

The tighter interest rate environment already commenced in June 2006 when CPIX inflation jumped from 3,7% in April to 4,8% in June 2006. Two years ago, the expectation was that the upward interest rate phase could last for about 18 to 24 months, and that prime interest rates would peak at around 13 or 14%. However, the runaway oil price which squeezed costs all around and even caused a sharp increase in global food prices, necessitated an ongoing revision in forecasts and expectations about when interest rates would peak and at what level.

Of course most of the inflationary pressures during the next couple of months will still come from escalating food and oil prices, and it is impossible to tell when and where these prices will start to subside. Therefore a further 50 basis point increase in interest rates appears all but certain. But if oil and food prices should start to stabilise within the next two to three months, there seems to be at least a possibility that rates could peak in the third and fourth quarter of this year and that they might then start to decline by early 2009. more...