Tuesday, October 23, 2007

Wednesday: Howard's end?

Politicians, economists and Reserve Bank staffers are on tenderhooks ahead of inflation figures due for release this morning expected to provide the trigger for a pre-election rate rise.

An interest rate rise decided at the Bank’s Melbourne Cup day board meeting would come just 17 days before polling day and most likely deal a fatal blow to the Coalition’s re-election campaign.

The Treasury’s Pre-Election Economic and Fiscal Outlook released yesterday continued to forecast an annual headline inflation rate of 2.75 per cent in the year ahead implying a quarterly rate of 0.68 per cent, low enough to allow the Reserve Bank to leave interest rates unchanged.

But the so-called “trimmed mean” inflation rate that the Bank uses to guide its deliberations jumped sharply to 0.9 per cent in three months to June, well in to the Bank's danger zone...

If the trimmed mean inflation rate for the three months to September to be released today is also close to 0.9 per cent as is thought likely, a Melbourne Cup week rate hike will be almost automatic.

To delay would be to risk a third successive 0.9 per cent quarterly rise and to lose control of inflation.

Late yesterday private sector economists were forecasting a trimmed mean rate of 0.9 per cent for the September quarter, with some suggesting it could be higher.

Several had boosted their forecasts in the wake of the producer price index released on Monday which showed that the price of Australian-produced goods jumped 1.5 per cent in the quarter.

A rate rise on Wednesday fortnight would be the sixth since the Prime Minister launched his campaign for the last election from a podium that read “keeping interest rates low”.

It would push up the standard bank variable interest rate to 8.55 per cent, lifting the monthly repayment on a 25-year $400,000 mortgage to $3,167.

The head of the National Australia Bank John Stewart yesterday told the Australian Financial Review that further increases in mortgage rates were likely over and above those dictated by the Reserve Bank once the election was out of the way.

“Once things settle - and probably once there is no election looming - prices will rise because credit is underpriced,” he was quoted as saying.

Campaigning in Adelaide yesterday the Prime Minister said that banks' lending practices were “entirely a matter for them” and that the most important question facing voters was “who is better able to manage our $1.1 trillion economy”.

Mr Howard added to the $34 billion of tax cuts he promised last week an extra $4 billion in additional payments to old-age pensioners, carers and disability support pensioners.

Asked whether the injection of so much exra cash would fan inflation further and force the Reserve Bank to push interest rates still higher he replied: “I don’t regard it as inflationary to make sure that pensioners are protected against the impact of cost of living increases. I think, you know, economics has lost its meaning if you regard something like that as inflationary.”

The Coalition and Labor campaign promises, each exceeding $47 billion, are unlikely to influence the Reserve Bank board's immediate decision at its Melbourne Cup day meeting.

But they are likely to help determine how many more times the Bank feels it needs to increase interest rates beyond November.