Inflation data key to rates, says RBA

There is a strong chance that borrowers will face an interest rate rise in August in the midst of the federal election campaign, as economists say the pace of inflation is expected to have gathered pace.

The forecast by economists is at odds with the Reserve Bank of Australia (RBA), which expects underlying inflation to have eased when official inflation data is published next week.

The minutes of the RBA's July 6 board meeting, released on Tuesday, say that an August rate rise is likely if official inflation data is higher than expected .

However, the central bank expects underlying inflation to have fallen even though the headline rate may be higher.

The RBA said the underlying measure of inflation would fall to be below three per cent - and into its preferred target zone - for the first time in three years.

The minutes show the RBA left the cash rate on hold at 4.5 per cent for the second straight month in July because the domestic economy had performed well and the global economy was growing at around trend pace.

The central bank said the June quarter Consumer Price Index (CPI) data, due on July 28, would determine its decision at its August 3 monetary policy meeting.

"Headline inflation was expected to rise, owing to the effects of some tax increases, with the year-end increase in the CPI rising above three per cent," the minutes said.

"The important question for the board at the next meeting would be whether the new information materially changed the medium-term outlook for inflation.

"Pending this information, the board judged it appropriate to hold the cash rate (in July) unchanged."

Nomura Australia chief economist Stephen Roberts said it was unlikely underlying inflation would have eased, meaning the bank was likely to push the cash rate up by a quarter of a percentage point to 4.75 per cent in August.

"A lot of it hinges on underlying inflation and what the CPI data shows," he said.

"They really do need that underlying rate to come in under three per cent, otherwise there's very little chance of them getting it under three per cent over the next year or so.

"Looking at the numbers we won't get that moderation ... so it's highly likely they'll look to raise rates in August."

The RBA board spent a large chunk of its July meeting talking about the European financial crisis, the minutes show.

But the RBA also saw positives in Europe, with the German labour market holding up "very well" while European gross domestic product is expected to record a solid rise in the June quarter.

Mr Roberts said that even if the European crisis worsens, the RBA would not raise rates if the underlying rate of inflation eased.

In contrast to much of the European Union, the central bank noted Asian economies remained robust.

Commodity prices eased slightly as some Asian economies, most notably China, slowed in May and June to a "more sustainable pace", the minutes show.

Commonwealth Bank senior economist John Peters said while the RBA was a little more concerned about Europe, the official inflation data was at the top of their minds.

Mr Peters said there were risks the underlying rate would not ease as the RBA expected at its July meeting, and predicted an increase in the rate of 0.7 per cent.

"Certainly we think they'll be looking for that smoking gun on inflation, the quarterly CPI data, which will be pivotal for their near-term policy path.

"They're saying basically the headline rate is going to be above three per cent, mainly because of tobacco taxes," he said.

"But more importantly, the underlying rate is going to slip back into the RBA's target zone. The risks are there that we get something that doesn't do that."

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

• Bookmark this page
• Share this article
  •  
  • facebook
  • slashdot
  • digg
  • Reddit
  • stumbleupon
  • linkedin
  • twitter
• Got more on this story? Email CIO
• Follow CIO on twitter

• Share
  Share this article

  •  google+
  • facebookfacebook
  • slashdotslashdot
  • diggdigg
  • RedditReddit
  • stumbleuponstumbleupon
  • linkedinlinkedin
  • twittertwitter
• print
• email
• Bookmark