Rate-rise risk remains: RBA

The chance of another rate rise in the next six months remains well and truly on the cards, but hardly a forgone conclusion, following testimony by RBA governor Glenn Stevens to a parliamentary economics committee. Stevens said the main risk to the Australian economy remains inflation, rather than the current turmoil on financial markets, which he says at this stage will have limited if any impact on the real economy. While there is concern about the current distress in financial markets brought on by the US sub-prime mortgage market shake-out, and developments will have to be watched closely, at the same time both the Australian economy and the world economy in general are proving surprisingly strong this year, he said. This has led to the increase in the RBA's inflation forecast for 2007, revealed in its quarterly monetary policy statement this week, to 3 per cent, the upper limit of its target band. If things play out as Stevens predicts there may well be need for another rate rise late in the year or early next. Stevens did little to hose down expectations among some that another rate rise might come before the end of the year, saying in the context of the federal election the RBA would move rates "whenever it sees fit". But on the other side of the ledger, Stevens did say that assessing the true strength of the pick-up in economic growth and inflationary pressure in recent months has been difficult. He also noted that wages growth remains contained, a key indicator watched by the RBA in gauging inflationary pressures. The Wage Cost Index is at an annual rate of 4 per cent despite a higher than expected 1.1 per cent rise in the June quarter. The annual rate has hovered around the 4 per cent level this year, showing little sign of pushing up to the 4.5 per cent level that sounds alarm bells at the RBA over cost-push inflation. And if the financial market woes continue on, sharemarket investors could conceivably be rattled enough for there to be a dent in consumer confidence this quarter that might take some heat out of the economy. So it's not a forgone conclusion that rates are going up again in late 2007, early 2008, but it must remain a distinct possibility.