Sharemarket nerves may keep rates on hold

The chances of an interest rate rise in August are receding as world sharemarket instability worsens week by week. We’ll have a much clearer idea of the immediate future for rates after the quarterly inflation figure is released on Thursday. A benign CPI for the June quarter is likely to see the Reserve Bank content to leave interest rates on hold for the moment. This would be the prudent course of action with the crisis of confidence in the US share market becoming more entrenched and radiating instability around the globe. An underlying inflation reading of more than the expected 3.1 percent may yet prompt another quarter-percent rate rise, depending on the state of financial markets come the first week of August. Consumer sentiment remains high despite the latest Westpac-Melbourne Institute index falling almost 3 per cent this month. Consumer confidence has underpinned much of the performance in our economy over the last year and while retail sales and other domestic indicators stay strong, the RBA is unlikely to stray too far from its stated aim of raising interest rates over the short to medium term. Elsewhere, the drought in eastern Australia might soon be of a magnitude to put it on the RBA’s radar screen. Although accounting for a small part of GDP, the Commonwealth Bank says severity of this drought may be enough to create a noticeable drag on economic growth in coming months.