Macfarlane's parting gift

Outgoing Reserve Bank governor Ian Macfarlane says further interest rates rises may well be needed to ensure that inflation is kept in check. Under questioning from a federal parliamentary committee, Macfarlane conceded the RBA had upgraded its inflation forecast in recent months after underestimating the inflation threat earlier this year. He said that this reflects a probability that official interest rates are more likely to rise again than not. "It's more likely that there will be, than there won't be," he said, "with the sort of capacity constraints we're talking about, with the economy growing at a reasonable rate, and with probably inflationary pressures coming from abroad." Underlying inflation is running at almost 3 per cent per annum by RBA preferred measures, the top of the target range. "The household sector is still in good shape, and has not retreated into its shell as a result of the rises in petrol prices and the May interest rate increase." But other economic developments this week suggested that inflation may be able to be reined in without more interest rate action. Figures showed that wages growth, a key factor in inflationary pressures, was running at 4.1 per cent in the June quarter, and hasn't risen in recent months as had been feared. Meanwhile, consumer sentiment has dipped sharply after last month's second rate rise in three months. How much and how quickly it recovers over the next couple of months will provide clues on the likelihood of more rate hikes later in the year.