Expect an Interest rate rise next week.
by Ivan Fletcher, 27/07/2006

It would take a strong reserve bank with nerves of steel to abstain from an interest rate rise next week when they reconvene for interest rate discussions. For one thing, the market has already factored it in, banks have been inching up their fixed interest rates and the futures market has priced up cash rates already.

However, the more telling factor is that on Wednesday this week, we saw the quarterly announcement on inflation figures and ‘inflation’ has jumped above the magic 3.0% threshold with headline inflation for the quarter recorded at 4%.

Interest rate rises as a rule of thumb are the hammer used to quiet increasing consumer demand (you might say holding the reins on the economy from galloping ahead of itself to only run out of pep further down the track). It is inflation figures that are used to assess the speed of this horse (I mean economy).

A contrarian view offered by some including professor Ron Wood (Challenger  economics) is that it may well be that supply (and not Demand) is the real issue and thus the hammer is not required and may in fact have the opposite effect on the economy (i.e. slow it down too much)

The ABS in release of the CPI figures stated:

Quarterly: “The most significant contributors to the increase this quarter were fruit (+52%) and automotive fuel (+11.2%). They each contributed 0.5 percentage points to the 1.6% rise in the all groups CPI in the June quarter.”

In other words fruit and fuel contributed more than 60% of the quarterly increase leaving everything else rising by about 0.6% in the quarter or slightly less than 2½% annualised.

Annually: “Fruit contributed 0.6 percentage points to the 4.0% through the year CPI increase. Bananas accounted for most of the increase in fruit prices, both in the June quarter itself and through the year to June quarter. Automotive fuel contributed 0.9 percentage points to the through the year increase of 4.0%”, the headline rate.