The threat of deflation seems to have unequivocally established itself as the Investor: A key bogeyman facing those charged with formulating and implementing monetary policies.

During the late 1970s and early 1980s, inflation came to be the number-one enemy of the world's key central bankers. There then ensued a period of about 20 years when reducing inflation seemed to be the sole objective of central bankers in all countries.

The mantra of sound money and price stability was repeated again and again by successive central bankers.

However, over the past three years there has been a gradual but significant shift amongst central bankers towards downplaying the inflationary threat. This has been particularly so in the US where the Federal Reserve, led by chairman Mr Alan Greenspan, has been aggressively reducing interest rates in response to slackening inflation and a weakening economy.

In contrast, the European Central Bank (ECB) has remained stubbornly wedded to the view that targeting price stability is the overriding raison d'être of monetary policy.

Shifts in the policies adopted by central banks tend to occur at a snail's pace and therefore a recent statement by Mr Greenspan which confirmed that deflation was a "possibility" sent shockwaves through the world's financial markets.

For many it served to confirm that a watershed had been reached in that the world's most powerful central bank was now seriously concerned about the deflationary threat.

The reaction in the financial markets has been most evident in the bond markets, where yields on government bond securities declined to in excess of 45-year lows.

The accompanying table provides data on short-term interest rates and government bond yields for Germany, Britain and the US. Turning first to 10-year bond yields, which have become the benchmark yields when making international comparisons, yields are extremely low.

In the case of Britain, the 10-year yield of 3.98 per cent is in fact an all-time low. Nevertheless, this yield is slightly higher than that available from the equivalent German bond (3.64 per cent) or the 10-year US bond (3.30 per cent).

Yields at the very long end of bond markets have also declined significantly across the board. The yield on the 30-year German bond is now 4.45 per cent compared with slightly lower yields of 4.25 per cent for both British and US bonds of equivalent maturities.

Many market analysts are interpreting the most recent falls in yields as signalling that a period of mild deflation in the industrialised economies is now likely.

Assuming that investors in long-term bonds require a real or inflation-adjusted return of 3 per cent, current 30-year bond yields imply that the future inflation rate will average 1.25-1.5 per cent.

For example, the implied future inflation rate in the US may be estimated as the yield of 4.25 per cent on the 30-year bond, less an assumed expected real rate of return of 3 per cent, which equals an implied future inflation rate of 1.25 per cent.

The fact that investors are prepared to purchase bonds at such low rates of interest certainly strengthens the view that inflation rates are likely to go lower over the next 12-18 months.

This trend towards lower inflation rates, combined with slow economic growth, increases the likelihood that official short-term interest rates will be lowered in the near future.

Money market participants would seem to be attaching a high probability that such an outcome will occur.

This may be gleaned from the fact that the rates of interest on three-month money in sterling, dollar and the euro are now below official interest rates.

In Germany, three-month money now yields 2.27 per cent compared with the official ECB rate of 2.5 per cent. In Britain, three-month money is trading at 3.53 per cent as against the 3.75 per cent official short-term interest rate.

Even in the US, where the Fed Funds rate is at 1.25 per cent, three-month money is trading at the slightly lower level of 1.19 per cent.

We can conclude therefore that the money markets are now pricing in a further cut in short-term interest rates of approximately 25 basis points (0.25 per cent) across the major currency zones of the dollar, euro and sterling.

Indeed, a larger cut of 50 basis points from the ECB is a growing possibility in view of the strengthening euro.

Irrespective of whether interest rates are reduced further in coming weeks, a period of very low inflation and interest rates has arrived and is likely to persist for the foreseeable future.