CPI to make or break November rate rise

There was little economic data released over the past week with relevance to the interest rate outlook. But even if there was, there is really only one figure that matters in terms of the chances of interest rates rising in November – the rate of underlying inflation to be revealed in the upcoming CPI figures next Wednesday.

The odds have shortened on a 0.25 percentage point rate hike; all the signs from new Reserve Bank governor Glenn Stevens are that his finger is firmly on the trigger to lift interest rates for the third time this year, come the first Tuesday in November.

While the official headline rate of inflation is set to fall from the heady levels of 4 per cent three months ago, if the underlying figure stays around 2.8 per cent or goes higher, then we can expect rates to rise. Stevens showed perhaps more of his cards than predecessor Ian Macfarlane might have in revealing two weeks ago that ongoing strong jobs growth belies the sluggish official GDP growth figures. He also said he didn't believe the slowdown in the US or elsewhere overseas would be significant over the next year.

Reading between those lines suggests that the RBA feels inflationary pressures aren't going to subside and given the levels they are currently, the risk of inflation rising outside the 2-3 per cent target band is high enough to warrant another rise. This would take the official cash rate to 6.25 per cent and the average variable home loan rate above 7.5 per cent.