Rates steady despite strong economy

The Reserve Bank (RBA) left interest rates on hold this week and can be expected to hold off again next month at least, despite the flow of economic data showing an economy going gangbusters. Employment and overall economic growth figures underscore a very strong economy in 2007. Another 30,000 new jobs were created in August, 20,000 full-time, with unemployment remaining at a low 4.3 per cent. Meanwhile, June quarter GDP came in at 0.9 per cent. This puts the annual rate of economic growth to the end of June at a strong 4.3 per cent. But remember, this rate averages out a surprisingly weak rate of growth at the end of last year with surprisingly strong growth this year. Looking at GDP this year so far gives an annualised rate of 5.4 per cent. When you add other indicators such as healthy retail sales and business investment readings out last week, you'd be forgiven for thinking another interest rate rise is not far away. But it's not quite the case, for a few reasons. One, the latest batch of strong figures largely pre-date the August rate rise and the RBA is unlikely to act on rates until it sees some early signs of what impact that first strike is having. Second, no matter how strong the economic data is, the RBA is only worried if high growth triggers rising inflation. It will likely want to see the inflation result for the current quarter, out in late October, before seriously considering any further moves on rates. Finally, the turmoil on world financial markets over the past month or so has introduced new risks to the world economy and Australia. The RBA will be a little more cautious on rates while the risk of a possible spillover to economic activity around the world remains. If that doesn't happen, and the inflation threat hangs around, it is quite possible we will see another 0.25 percentage point interest rate rise. But this would be late this year at the earliest, and more likely in early 2008.