Petrol the only threat to rates

The only real threat to interest rates at the moment appears to be rising fuel prices and the implications they have for inflation.

On Wednesday, the CPI for the June quarter is released against a backdrop of rising inflation in the previous quarter. But many of the causes of the uptick in inflation now appear to be under control in a moderately growing economy – except petrol.

Record international oil prices should push the headline rate of inflation towards the upper limit of the Reserve Bank's target band of 2 to 3 per cent, its basis for setting interest rates. But the underlying rate of inflation, taking out volatile and one-off movements, is predicted to remain comfortably inside the target band.

Only if this is not the case, can we expect any change in the stable interest rates outlook. If fuel prices stay high for an extended period, the ongoing inflationary flow-through effect on the economy will see the danger of higher interest rates emerge.

This flow-through effect is reflected in producer price indexes which show what is happening to input costs for businesses. The latest producer price data comes out Monday and we'll get a big clue on the likely inflation result.

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