Rate rise chance remains, election or not

The Reserve Bank (RBA) retains a leaning towards higher interest rates in 2007 rather than lower, that much is clear. That's not to say we will get a rate rise, only that the possibility is certainly there.

This was confirmed by RBA governor Glenn Stevens in testimony to a parliamentary committee this week, along with the assertion that, if the RBA board decided a rate rise was needed around the time of the federal election, it would have no hesitation in delivering one regardless of the political consequences.

Although it would never admit it, over the past decade the RBA has tended to avoid rate moves in the lead up to an election to avoid any perception that monetary policy had been politicised. This has worked in the Howard government's favour with three of the last four elections seeing no rate action for many months in the lead up to polling day. 2001, was the exception with rates falling in preceding months.

These days, however the independence of the RBA appears to have evolved to the point where it feels confident enough to truly act independently and impose monetary policy regardless of the political cycle – even if that means raising rates before an election.

The fact that rate movements nowadays tend to be in smaller increments, 0.25 rather than 0.5 or 1 percentage points, may have something to do with it. Each individual move has a lesser impact, even allowing for higher indebtedness levels.

The latest wage growth figures – for the December quarter – showed an increase of 4 per cent and a level in keeping with the latest RBA thinking that rates may have to rise but there is no need for a hike yet.

The RBA's speed limit for wages growth is 4.5 per cent. Above that it sees an inflation threat and a need for interest rate rises. The latest figures show that wages growth in the mining, construction and utilities sectors is well over that limit, not surprising in the midst of a resources boom. But the rest of the economy is seeing only moderate wage growth of 3.5 to 4 per cent, despite the heavy demand for workers seen in the employment growth figures.

Cutting the figures another way, the private sector saw 3.8 per cent wage growth on average, yet the public sector saw 4.5 per cent (something to do with the flurry of election activity at federal and state levels of late?). But then, the public sector is a fairly small proportion of the economy so no great inflationary threat there.