A pre-election rate rise? What to watch

The Reserve Bank Governor. Glenn Stevens, has declared that the bank will raise interest rates before the election, if it believes that is necessary.

Don’t doubt his word on that.

After all, the bank did just that, before the 2007 election, much to the chagrin of Peter Costello, who was then Treasurer.

We can report, confidently, that his successor, Wayne Swan, would be equally upset, if the Reserve Bank did it again, after its August meeting.

So how likely is that?

More likely, than would have seemed to be the case just a few weeks ago.

The Reserve Bank made no secret of the fact that possible weakness in European bank played a significant part in its decision to keep rates on hold last month.

And several economists have assumed that continued weakness in European national and institutional debt situations might well cause the Reserve Bank to hold off on its next rate rise until November, December or even into the New Year.

However, two possible changes could affect that assessment.

The authorities have now concluded, after an investigation,  that most European banks would survive the pressures, that a second downturn might produce.

And the Australian Bureau of Statistics is due to report on Australia’s inflation performance, during the June quarter, tomorrow.

The Reserve Bank makes no secret of the fact that it aims to keep Australia’s inflation rate within a 2 to 3 per cent range, over the course of a business cycle.

However the high profile Consumer Price Index is not the rate it looks at, when it makes that assessment.

The figure it studies, before making its decision, is the so-called underlying rate, which excludes special factors like fluctuations in petrol prices.

The Statistician produces this figure too, although it usually gets less attention than the raw CPI rate, which the Reserve Bank calls the “headline rate.”

The underlying rate, though, will be the one to watch, when the bureau releases its inflation figures tomorrow.

The background, too, will be important.

The Reserve Bank has now raised interest rates no less than six times, in its current round of  revisions.

It now regards its target wholesale rate, of 4.5 per cent    as close to “normal.”

However, very few economists would be prepared to say that the current round of upward revisions is already complete.

Most believe that the Reserve Bank’s target rate will be raised to at least 4.75 per cent.

The main debate, among economists, is over just when this will happen.