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Since June 2004, the US Federal Reserve has hiked its Fed funds target rate (FFTR) 16 times, each by 25 basis points, since June 2004. With only a few exceptions, central banks elsewhere have also been religiously pursuing monetary tightening over the same period. We also have the European Central Bank (ECB) starting to raise rates late last year, and the Bank of Japan announcing the end of quantitative easing back in March. The latter clearly paves the way for an exit of the zero rate environment.

If not for the strong global growth momentum, such synchronised monetary tightening could have been unnerving. And chances are such a phenomenon would not last for long. The moderation in global growth should become more evident later in the year and, apart from a few late starters, most interest rate up-cycles should peak in tandem, as risk towards inflation no longer prevails over risk towards growth. Moreover, some countries with weaker fundamentals would not hesitate to go for rate cuts - sometimes pre-emptively - when things turn sour.

In short, expect a rather different interest rate picture in the latter half of this year. In the face of an increasingly challenging economic backdrop, credible policy response, among many other factors, should help ensure the expected global slowdown to be anything but aggressive.

Fundamentally, there is indeed every reason for central bankers to be hawkish, at least for now. Global growth has been surprisingly strong throughout 2005 and such momentum has filtered through into Q1 2006. On the other hand, although global inflation numbers are nowhere alarming, high energy prices and strong labour markets have so far kept the pipeline inflationary pressures at high levels. The abundance of liquidity injected into the financial system after years of abnormally low real interest rates also means that there is plenty of room for policy rates to return to more 'normal' levels without causing a material liquidity crunch.

More specifically, the Fed's credible monetary policy and the popularity of US Treasuries among foreign investors have also kept US Treasury yields low by historical standards. Among the emerging markets, an additional source of liquidity over the past few years has been the ample capital inflows. A robust economic outlook has boosted global risk appetite, which in turn prompted investors to chase after higher yielding assets in the riskier emerging markets.

In Asia, on top of those whose interest rates track the US' closely (eg, Hong Kong and Singapore), the inflationary implications of the removal of government fuel subsidies (eg, Indonesia, Thailand and Malaysia) and strong credit growth (eg, India) are also some of the additional drivers behind the prevailing hawkish moods.

Having said that, looking into the second half of 2006, such a widespread hawkish stance could gradually fade. For one obvious reason, the monetary tightening trend has already gone such a long way that the resulting impact on liquidity should begin to take its toll on the real economy. But more importantly, the moderation in global growth, led by the US, looks set to become more evident by then. This is predicated on continued but moderate slowing in the US housing market into the second half of 2006, which works to slow consumer spending.

After hiking the benchmark short-term interest rate to 5 per cent last week, the Fed's only signal to the market was that it intended to be nimble and take its cue from developing economic data. We think the spate of rate hikes will stop here.

While acknowledging that the Fed could well push rates yet higher, chances are that the further the FFTR overshoots the 5 per cent mark, the earlier and faster the subsequent rate cut cycle will unfold. In any case, the first rate cut could come as early as Q1 2007, in our view.

New down-cycle

For economies with relatively weaker fundamentals, the beginning of a new interest rate down-cycle could come even earlier (Q3 2006 for New Zealand and the UK, Q4 2006 for Australia). Even though policy rates are likely to move higher still in the eurozone, Switzerland and Japan towards the year-end, they would no longer be seen as the global mainstream.

We have long been bullish on Asia. First quarter growth reports for China and Singapore have been impressive, and those that have yet to be announced will most likely further underscore our optimism in the region. But in most cases, monetary policy can still be considered as loose, and more tightening from Asia's central banks seems inevitable. That said, we are likely to see most regional interest rate cycles peaking one by one, either in this quarter (Hong Kong, Singapore, Thailand and Philippines) or next (Malaysia, South Korea and India).

For one, while domestic demand looks set to remain strong in Asia, the likelihood that external trade will moderate going forward, and that recent tightening will soon take its toll on regional liquidity, mean policymakers will refrain from running the risk of excessive tightening which could kill off the remaining growth driver from within. In addition, Asian currencies have been running strong, and look set to remain so towards the year-end. In some cases, slightly stronger currencies and reduced intervention could help temper imported inflation, reducing the need to hike rates further than otherwise.

The Monetary Authority of Singapore (MAS) noted in its recent monetary policy statement that the interbank rates, despite rising, have stayed largely in line with the historical average when measured in real terms. Over the past 15 years, excluding the Asian crisis period, the three-month Sing dollar Sibor minus inflation has been hovering within a -2 per cent to 2 per cent range. We are currently near the top end of it but with rates close to peaking. Further upside risk seems limited going forward. The stronger Singapore economy, as shown by the impressive 9.1 per cent year-on-year growth estimate for Q1, should be more than capable of handling current levels of interest rates. On the face of it, the persistent rise in borrowing cost over the past few years has so far done little damage to Singapore's real economy. Real GDP growth rates of 8.7 per cent and 6.4 per cent in 2004 and 2005 respectively could be regarded as strong by any standards. Property prices bottomed out in early 2004 and have since been on a gradual uptrend.

But if we take a closer look at the retail sales numbers, we should not have any trouble noticing that the pace of growth, while still positive, has been moderating over the past year. The outstanding total loans trend showed a similar picture, not only in terms of year-on-year change but also when expressed as a percentage of GDP. Although loans growth has rebounded somewhat in recent months, a sustained turnaround has yet to be ascertained. The good news is that the peaking of interest rates should help in this regard, lifting some weight off the shoulders of consumers as well as corporates going forward.

Yes, the subsequent decline in rates should at best be gradual. Nonetheless, this should be good enough to facilitate a gradual transition of growth drivers from external trade to domestic demand throughout the rest of this year, as the current IT up-cycle starts to moderate.

This should set the scene for the Singapore economy to grow at 6.5 per cent this year, a rate that exceeds the current official forecast range of 4-6 per cent as well as last year's 6.4 per cent.

The writer is an economist, global research, at Standard Chartered Bank