RBA dilemma: raise now or cross fingers

The current interest rate outlook can be summarised in one question: Is another rate rise needed to bring a buoyant economy to heel, or will the combination of some dampening local and overseas influences be enough to cool things down over the next six months anyway? Unfortunately, the economic evidence at hand at the moment remains conflicting and the answer could go either way. Worse still for the Reserve Bank, the answer won't become fully apparent until next year, well after the time to act has passed. The Westpac/Melbourne Institute leading index of economic activity, which attempts to forecast economic conditions three to nine months ahead, rose to 6.4 per cent in July, up from 5.6 per cent the month before and is now at a six year high. This fits with the bumper job market conditions. On the other side of the coin, the housing market is flat, consumer borrowing is down and we now have the spectre of serious drought conditions arising again. The current wheat crop along with others are on the verge of being lost in many parts of south eastern Australia and the El Nino outlook suggests things aren't going to improve over the next year. Meanwhile, international economic conditions seem to be cooling, particularly in the US and Europe, with signs of inflationary pressures easing. When you consider that there are already two interest rates rises still working their way through the economy, it may be that we see the heat coming out of the Australian economy by early next year without a rate rise.