RBA won't take chance on inflation

A third interest rate rise this year looks to be on the way in November, following the release of the September quarter CPI, which shows inflation still running at close to 4 per cent. The all-important underlying inflation calculated by the Reserve Bank from the headline figures has nudged up a little and now sits around 3 per cent or just over - right at the top of the target band for inflation. The RBA doesn't have to act to prevent inflation ever straying outside the 2-3 per cent target band, but it does need to ensure that it doesn't go too far above and averages out at a figure within the band over the medium term. The latest CPI reading does confirm that inflationary pressure is evident in the economy, as yet undented by the two rate rises we have already had this year. Furthermore, the Producer Price Index also reveals inflationary pressures pushing up wholesale prices too. The challenge for the RBA in deciding on whether to lift interest rates again in November is to judge whether or not there is enough deflationary offset in the pipeline flowing through in coming months - from the previous two rate rises, the falls in the oil price and a slowing US economy - to counter the obvious inflation pressures apparent in the economy at this time. Will inflation settle down by itself in 2007 or does the economy need another cold shower? It's always a very hard judgement to make. But one thing is certain, new RBA governor Glenn Stevens won't have many qualms about erring on the side of caution to make sure inflation is quenched before it goes too much higher. That probably means we can expect another 0.25 percentage point increase in rates on Melbourne Cup Day, November 7, taking official rates to 6.25 per cent and variable mortgage rates into the high 7s.