Rates up, but where will they stop?

The Reserve Bank raised interest rates to their highest level in ten years this week, the official cash rate rising 0.25 percentage points to 6.5 per cent. This will push variable home loan rates up by the same margin over the coming weeks, adding about $50 to the average $300,000 mortgage. No sooner had the widely anticipated quarter-point rise in official interest rates been duly delivered by the RBA board, then speculation began about a further rise. It is too early to start talking about further hikes. But it's clear that there is plenty of ongoing stimulus to the economy from the resources boom, strong business investment and plenty of federal government election spending that risks feeding further inflationary pressure. A return to strong monthly employment results for July has helped underscore this and why the RBA found it necessary to act on interest rates. Another 21,800 jobs created last month, most full-time, sees a quarter of a million new jobs over the past year. So the real economy is strong, but the current instability on financial markets can't be ruled out as a potential influence on interest rates. The longer it continues, the greater the chance that confidence among consumers and businesses is dented to an extent that economic activity takes a hit. There's no great evidence of that yet in Australia, but that concern must have weighed on US central bankers who decided to keep rates steady over there this week. A full insight into what the central bank is thinking on interest rates, inflation and the economy will emerge over the coming week with the quarterly statement on monetary policy due out on Monday and a parliamentary committee appearance by RBA governor Glenn Stevens on Friday. There is also the release of wages growth figures, an important indicator for inflation.