It would be an understatement to say yesterday's Bank of England interest rate rise came as little surprise. It had been as heavily flagged as a grand prix winner and the Chancellor of the Exchequer had indicated his support for it before it even happened.
Equally, the hailing of the Bank of England's move as the turn of a global interest rate cycle was predictable. After all, the next move in US interest rates will certainly be up and the same is likely for euro-zone rates, even if one more small cut from the ECB cannot be completely ruled out, if the nascent recovery appears to falter.
But while UK rates are now likely to be set on a gradual upward path, the timing of US and euro-zone increases is much less predictable. The world cycle may have turned, but it could be quite some time before the Federal Reserve and the ECB get on their rate-rising bikes.
In the US, the Fed spent much of the early part of the year feeding out the "deflation danger" message. Fed governor Ben Bernanke in particular spoke at length on the subject and on the Fed's determination to do everything possible to avoid a Japanese-style deflationary spiral. This has led some market analysts to conclude that the Fed will keep rates low for a considerable period, possibly until after next November's election. After its last meeting the Fed did nothing to shake this belief, saying that rates would remain at current levels for "a considerable period".
Another school of thought, however, is that the Fed now needs to get itself off the deflationary hook and prepare the markets for higher rates by next spring or summer. After all, the latest figures showed the US economy grew at a whopping 7.2 per cent in the third quarter of the year. This rate is based on the "annualisation" of a quarterly growth rate and will ease in the fourth quarter.
Nonetheless, the US economy looks to be on the way back. If the pace does not slacken too much, then it is hard to see how the Fed can hold off raising rates right through to next November's presidential election. Mr Bush might not like it, but rates could well be heading higher by next summer.
The European outlook is even more uncertain, particularly as the market still finds the ECB's monetary policy hard to fathom. As Mr Trichet said in his press briefing yesterday, while survey evidence points to some recovery in euro-zone growth, real indicators of a sustainable recovery are still awaited. Even then, the signs are that the euro zone may experience limited growth next year, perhaps no more than 2 per cent.
Against this backdrop, an early rise in euro rates seems most unlikely, particularly if the euro remains reasonably firm on the foreign exchange markets, thus holding down imported inflation. Recent positive news on the US economy - including a fall in jobless claims reported yesterday - has sent the dollar higher, though some analysts predict concerns about the widening current account balance of payments deficit will sooner or later send the currency tumbling.
This relatively benign interest rate outlook is good news for borrowers here. If the Central Bank still had control of monetary policy, then rates would be higher given the strong growth in the economy and in house prices. As it is, borrowers benefit from rates based on the much more sluggish economic performance of the main euro-zone economies. Whether this is inflating a dangerous "bubble" in borrowing and house prices here is a cause for concern, but it will be some time before higher interest rates test the resilience of Irish borrowers.
