As several central banks around the globe ever so gradually raise interest rates, could it be that the “Commodity Super Cycle” is coming to an end? The Reuters Commodity Index (CRB), after reaching a 25-year high (365.45) on May 11 this year, has fallen more than 30 points, or 9%, in the last three months.

Following US Fed Chairman Ben Bernanke’s less-than-subtle hint towards an interest rate pause on July 19 (“The recent rise in inflation is of concern, and possible increases in the prices of oil as well as other raw materials remain a risk to the inflation outlook. On the other hand, a slowing economy should reduce inflation pressures”) the CRB index has fluctuated widely.

The US Fed, or Bernanke more specifically, is betting that a slowdown in the US economy can keep the “Commodity Super Cycle” under wraps, as are other countries the world over, who in recent months have also taken steps towards tightening global liquidity.

To name a few, the Bank of Japan, the European Central Bank, the Bank of England, the People’s Bank of China, the Bank of India, the Swiss National Bank, the Reserve Bank of South Africa, and our own Reserve Bank of Australia have increased short-term interest rates over the past three months. 

By the end of 2006, more rate rises look likely in China, England, the Euro zone, Japan, South Africa, Switzerland, and, yes, Australia (remember the Government’s promise of low interest rates forming the cornerstone of their last election campaign?)

According to Nick Raffan’s recent article — “Is The Commodity Super Cycle Fizzling Out?“: “It’s probably fair to say that the legion of 8,800 hedge funds, which control $1.2 trillion, are losing their speculative appetite for commodities, as global interest rates rise, and were behind the August sell-off in the CRB index.”

The Oz’s economics editor Alan Wood raises some interesting points in today’s article “Budget Options Narrowing“. Will John Howard be able to repeat the dose of big-spending programs and tax cuts that has been a crucial part of his winning formula? Or more to the point, can he do so and retain the economic credibility vital to his Government’s survival? 

Wood believes the answers to these questions can be found in the nexus between interest rates and fiscal policy, recently spelled out by outgoing RBA Chairman Ian Macfarlane. 

Read more at Henry Thornton.