Interest rates to rise globally in 2005

ALAN GREENSPAN is the Chairman of the Federal Reserve Bank of America, the most powerful central bank in the world.

He has held his post since 1987, when he was first appointed by Ronald Reagan, and he has subsequently been re-appointed by three other presidents, both Republicans and Democrats.

So despite the fact that Greenspan spent a brief period at the start of his career as a clarinet player with a travelling swing band, his subsequent career as an economist and his unprecedented 17 years at the helm of the Fed have earned him enormous respect in the markets.

After all, it's hard to discredit the man who presided over the longest bull-run in US equity market history, even if Greenspan has some distracters who criticise the Fed's failure to deal with 'irrational exuberance' in the late 90's.

That's why many US traders were shocked to hear comments made by Greenspan back in December on the subject of interest rates.

For all the respect he has earned, Greenspan still insists on speaking in a peculiarly academic manner, but when commenting on interest rates last month, he was uncharacteristically blunt.

According to the Chairman of the Fed, the most respected central banker in the world, "rising interest rates have been advertised for so long and in so many places that anyone who hasn't appropriately hedged by now is desirous of losing money".

And given that Greenspan is the man who presides over the committee that decides when to hike US interest rates, he really is in a position of authority from which to make such a declaration.

Now obviously this relates only to the US the Fed has no influence on interest rates on this side of the Atlantic.

But that's only true to a point; technically the eurozone's common interest rate is set by the European Central Bank in Frankfurt, but the ECB's governing council doesn't make its decisions in a vacuum.

The reality of modern interdependent global financial markets is that American interest rates set a course which virtually all other central banks follow.

It's like the old saying goes, 'when America sneezes, we all catch a cold'. And judging by commentary from Federal Reserve officials last week, America is starting to feel an inflationary chill.

Core consumer price inflation in the US appears to be contained (running just above 2% year-on-year), but other indicators paint a different picture.

US petrol prices have risen by almost 50% in the last 12 months, grocery costs have risen by 6%, and healthcare inflation is running at 8.2%.

Meanwhile average US earnings have fallen by 1.6% over the same period.

Americans simply aren't earning enough to keep up with soaring costs. That's why we think the Fed will take sharp corrective action in the year ahead, and hike US rates by 2.00%.

And needless to say, if America does catch an inflationary chill in 2005, then it won't be long before we in the eurozone catch a cold, which will only be treatable with higher interest rates.

The views and opinions expressed in this article are those of the author and do not necessarily correspond with those of Ulster Bank or any other member of the RBS Group.