Rate rise looks all but certain despite government spin

In a blow to the Howard government's campaign to keep rates on hold the International Monetary Fund (IMF) has warned that central banks may need to increase interest rates in a bid to keep a handle on the sustained period of strong economic growth. Many national economies (including Australia) are operating at or near full capacity. The IMF comments follow the surprisingly high inflation numbers released in Australia on Wednesday, brought about by a strong acceleration in consumer prices in the June quarter. Federal ministers, led wholeheartedly by the "Dynamic Duo" of Howard and Costello, are insistent that the annual inflation rate is well within the Reserve Bank's target range of between 2 and 3 per cent, and that there is no reason for the Reserve Bank to increase official cash rates. The financial markets however believe the government's argument will fall on deaf ears and have priced in an 83 per cent chance of a 25 basis point increase in official rates when the Reserve Bank meets on Tuesday the 7th of August. A snapshot of the local and international economy's growth forecasts out to 2008 indicate that the Reserve Bank will be cautious in allowing any inflationary pressures to gather momentum. A hawkish approach may deliver some short term pain but will assist Australia in avoiding any significant periods of a sustained downturn in the future. The Australian economy is experiencing an almost one-off alignment of conditions; near record rates of unemployment, record rates of participation, high levels of consumer confidence, business investment confidence and housing prices recovering to near 2004 prices in many capital cities. These indicators combined make the case for an August rate rise highly compelling.