Wednesday, July 07, 2010

Lock August 3 in your diary, it's the most likely date for a pre-election hike


A mid-election campaign interest rate hike is now a live possibility after the Reserve Bank board signaled a potential move in August.

The Bank's August 3 meeting is the only one in the expected campaign period set to follow the release of official inflation figures, on Wednesday July 28.

The underlying rate of inflation calculated by the Bureau of Statistics for the Bank has been hovering above 3 per cent for three years. The Bank is understood to be uncomfortable with such a level, given that its target is for a rate of between 2 and 3 per cent on average over the economic cycle.

The Bank's best guess is that the underlying rate will come down when the June quarter figures are released on July 28. If it does it will keep rates on hold, almost certainly until it meets on Melbourne Cup day in November after the release of the September quarter figures.

But if, against expectations, the figure released on July 28 remains high the board will consider a further hike on August 3 notwithstanding the imminence of the election...

Governor Glenn Stevens made clear he felt no inhibition about lifting rates during an election when he lifted the cash rate from 6.5 to 6.75 per cent weeks before the November 2007 poll that brought about the defeat of the Howard Government.

Mr Stevens met with Prime Minister Gillard on Friday to discuss the Bank's operations.

The board stressed in the statement released after yesterday's meeting that it will swayed by underlying inflation rather than the better-publicised headline rate noting the headline will be distorted by the one-off 25 per cent hike in tobacco tax on April 29.

The tax increase is expected to add between 0.3 and 0.4 percentage points to the headline inflation rate, two thirds of it in the June quarter and one third in the September quarter. It won't show up in the underlying rate.

An unwelcome reading on July 28 will not guarantee a move by the Reserve Bank on August 3. It will also take into account international developments, which have the potential to make a August hike unwise. In addition, if it believes that inflation is on track to come down in future quarters of its own accord it may take no action, although the recent behaviour of inflation makes this unlikely.

A pre-election rate increase in the Bank's cash rate from 4.5 to 4.75 per cent would add a further $48 to the monthly cost of repaying a $300,000 mortgage and $64 to the cost of repaying a $400,000 mortgage, taking the total extra costs since October to $283 and $339 per month.

In welcoming the Bank's decision to keep rates steady in July Treasurer Wayne Swan said a family with a $300,000 mortgage was still paying around $450 a month or $5400 a year less than before the crisis hit.

"While we have fought off recession and kept unemployment low, we know a lot of people are doing it tough and recent rate rises have stretched family budgets," he said.

"Don't forget the Liberals promised to keep rates at record lows, but watched as they went up ten times to a level 2.25 points higher than where they are now."

JP Morgan chief economist Stephen Walters said he an August move was on, noting a "subtle’" shift in the Bank's rhetoric. "That is, the Aussie economy is travelling along nicely and inflation is stubbornly high," he said. "As such, we believe this tightening cycle has some way to run."

Separate figures released yesterday showed Australia's trade surplus hitting a 14 month high of $1.6 billion as higher coal and iron ore prices kicked in.

Published in today's SMH and Age

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