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To: Rarebird who wrote (35978)	6/27/1999 11:59:00 AM
From: goldsnow	Read Replies (1) \| Respond to of 116753

Crisis over: interest rates on the rise By Tony Boyd, Global Markets Editor The world interest-rate cycle is expected to shift upwards this week when the United States central bank raises official rates for the first time in four years in a pre-emptive strike against inflation and economic overheating. Financial markets are expecting at least a quarter of a per cent increase in the US Federal Funds rate from 4.75 per cent to 5 per cent at the close of the two-day Federal Open Market Committee meeting on Wednesday (Thursday morning, Australian time). The rate rise, which some speculate may be as high as 50 basis points, is expected to mark the beginning of a rate-rise cycle that may see US official interest rates rise by 1 per cent over the next 12 months. Economists view the imminent rate rise as a sign that the US believes stability has returned to the global economy following the financial market turmoil in the wake of the Russian debt default last year. "The Fed will eventually take back all of last fall's 75-basis-points crisis-induced easing," said Mr Stephen Roach, the chief economist at Morgan Stanley Dean Witter. "To do otherwise and maintain short-term interest rates at crisis-determined levels would risk a tactical policy blunder of monumental proportions for a fully employed and rapidly growing US economy." US bond and equity markets sold off last week in anticipation of the rate rise, which was telegraphed by the chairman of the US Federal Reserve, Dr Alan Greenspan, last week. In testimony to the US Congress, Dr Greenspan said "modest pre-emptive actions can obviate the need Continued page 38 of more drastic actions at a later date that could destabilise the economy". Dr Greenspan said the recovery of the financial markets over the past nine months "would have suggested that at least part of the emergency injection of liquidity, and the associated 75 basis points decline in the fund rate (in late 1998) ceased to be necessary." Global bond markets have been bracing for the rate rise since May when the Federal Reserve Board signalled a change in its monetary policy bias from neutral to tightening. The rise in US bond yields over the past month has been transmitted directly to bond markets around the world with the exception of Japan which is in the midst of a rally driven by its own peculiar fundamentals. Australian long bonds, which have been trading at a 20 basis point spread above the US 10-year government bonds, are likely to rise in tandem with US bonds. But economists believe the spread may narrow after the rate rise in the US occurs. Mr John Edwards, chief economist at HSBC Markets said yesterday that the new interest rate cycle triggered by this week's rise in rates would not be as severe as the last US rate rise cycle when official rates rose 300 basis points in the space of 12 months. Economists at Deutsche Bank said the markets would closely scrutinise the Fed announcement this week to glean information about future rate hikes and market direction. Mr Joseph Carson, chief fixed income economist at Deutsche Bank Securities, said the biggest negative from the upturn in the global economy was the reversal in liquidity. Analysts have said that a 25 basis point rate hike could send a signal to the markets that the US central bank is concerned about providing sufficient liquidity to cover the impact of the Year 2000 computer bug problem. A 50 basis point hike may trigger a rally because it would signal that it was the first and last rate hike for 1999. But Dr Greenspan has never before raised rates by more than 25 basis points in one shot. However, monetary policy in Australia appears to be on hold indefinitely after RBA governor Ian Macfarlane recently downplayed expectations of higher interest rates here. A Commonwealth Bank report said that there was nothing in the domestic outlook to support a tightening bias by the RBA currently built in to financial market settings. Later in the week domestic data releases will take some of the spotlight off the US. On Wednesday, market watchers will be looking to assess whether domestic demand has started to slow sufficiently to arrest the trend blow-out in the trade deficit. The general consensus is that the balance of goods and services will come in at -$1.6 billion for a May following the $1.9 billion deficit in April. Retail trade figures will be released on Thursday with the market expecting a 0.6 per cent rise for May, following a 1.8 per cent fall in April. Economists are also expecting some strength in building approvals figures following a relatively flat trend since the begining of the year. afr.com.au