Predicting interest rates in a volatality

Bond markets:-
Provides an early idea of the direction in which interest rates will move.
Yields on govt. bonds have fallen to a four-and-a half year low---- a clear sign that deposit rates will follow suit.

To a certain extent bond yields are determined by the extent of liquidity in the market.

Inflation:-
It is logical that interest rates in an economy should be higher than the expected rate of inflation.
If rates were lower, it would make more sense for the lender to purchase goods and sell them a year on.
If there is a situation of low interest rates and higher inflation, it is clear that something has got to give.

Yield curve:-
Interest rates go up along with the term.
A two year deposit should get higher rates than a one year and so on. If banks offer higher rates on long-term deposits, it is clear indication that they expect present high rates to be of a temporary nature, and that rate could go down in future.

So what does 2009 hold for interest rates? Clearly, there is slope for a reduction in deposit and lending rates.

However, govt. bonds have already priced in an interest rate cut. The yield on the 10-year govt. bond has fallen to four-and-a half year low of 5.5%.