Rate rises:why they are still imminent

With Australia’s present inflation rate still below the Reserve Bank’s target range, it might seem strange that the authorities are even thinking of raising the nation’s interest rates.

Yet that is exactly what is happening.  The recent increase of 25 basis points in the bank’s target rate won’t be the last.

Tomorrow’s planned release of  the September quarter inflation figures will be a key factor in what will happen to the interest rates you are expected to pay.

The Reserve Bank wants to keep inflation within a 2-3 per cent range, over the course of a business cycle.

Australia’s current inflation rate, on the Statistician’s June Quarter Consumer Price Index is just 1.5 per cent.

However that is just what economists call the nation’s “headline rate” of inflation.

The Reserve Bank looks at what it calls “the underlying rate” of inflation, when it reviews its target interest rate.

It says that is already above its present target range.

The bank’s board will next meet early next month, to review rates.

There is some good news, though.

The inflation, reflected in tomorrow’s Consumer Price Index figures, is likely to be moderate.

Especially as the Australian dollar has been steadily gathering strength, particularly against the $US, over recent weeks.

That tends to make petrol – and other items Australia imports from overseas – at least a little cheaper.

That, in turn, will restrain inflation, without aggressive action from the Reserve Bank.

However, there are other, less favourable influences, too.

Australia’s population, for example, has been growing strongly.

That has outpaced the nation’s rate of home construction.

These factors make another burst of home price inflation a real risk.

That worries the Reserve Bank.