Get ready for another rate rise!

Date: 19/5/2010

A big surge in consumer confidence indicates that the economy is regaining strength, which could lead to another interest rate rise as early as 3rd August when the Reserve Bank board meets to discuss the national Monetary Policy.

This month's Westpac-Melbourne Institute Consumer sentiment index revealed that consumer sentiment recovered 11.1 per cent in July, the strongest monthly jump since June 2009; a fact that stunned economists who have put it down to a strong jobs market and the resolution of the Federal Government's proposed mining tax.

Admitting surprise Westpac's chief economist Bill Evans said. "We saw a comparable surge in confidence in 2009 when households realised that Australia had avoided recession but at that time the index was recovering from a much lower level."

Most economists agree that the Reserve Bank will lift official interest rates again this year in order to curb inflation.

The nation's latest unemployment figures pretty well guarantee another interest rate rise this year. (The jobless rate fell to 5.1 per cent in June - the lowest since January 2009 - and more than 120,000 jobs have been added to date this year.)

Fairfax press maintains that the chance of the RBA hiking rates a quarter-percentage point in August is now one-in-five.

The next round of inflation figures will be released at the end of this month. If prices are heading north a rate rise in August would be a sure bet if an election was not on the cards.

The one variable in all this is politics. RBA has only once lifted interest rates during a federal election campaign. That was in 2007 and was due to the increase in underlying inflation in the September quarter.

But news.com suggests that Julia Gillard is facing the prospect of a rate rise in the middle of an election campaign after almost 50,000 people were added to the workforce last month, which put upward pressure on inflation.

Employment Minister Simon Crean said the positive jobs result and its impact on inflation would not necessarily prompt the RBA to move on rates in August.

"What it does in the future is up to them, Crean said.

"But I think that we should welcome the fact that we've got strong jobs growth and it is in the Reserve Bank's charter to not just be concerned about inflation but to also be concerned about employment opportunities."

But there is no doubt that a mid-election campaign interest rate hike is a strong possibility. The RBA's board has already signalled a potential move in August and its meeting on 3rd August will follow the release of official inflation figures on 28th July.

The underlying rate of inflation calculated by the Bureau of Statistics has been hovering above 3 per cent for three years. The RBA's target is for a rate of between 2 and 3 per cent and is said to be uncomfortable with the current level.

The International Monetary Fund forecasts the Australian economy to grow at a solid rate for the next two years, but the IMF's warning that downside risks to world growth have intensified will also play a part in the RBA's decision about whether or not to lift the cash rate.

International developments will significantly influence any move by the RBA in August. The view of most economists is that the central bank is unlikely to raise the cash rate again while markets remain unsettled by developments in Europe's debt crisis.

The Age says if the RBA believes that inflation is on track to come down of its own accord in future quarters, it may take no action.

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