Rate Rise likely to fuel Melbourne Cup hangover

A third interest rate increase for 2006 appears to be a near-certainty after the release of September Consumer Price Index (CPI) data today. The CPI showed an increase of 0.9 per cent for the September quarter, taking the annual rate to 3.9 per cent. Inflation continues to be fuelled by high fruit prices, whilst the increase was lower than that recorded in the June quarter (1.6 per cent), underlying inflation (3.2 per cent) is tracking above the Reserve Bank of Australia (RBA) self-prescribed comfort zone for inflation of 2 to 3 per cent. The RBA looks certain to make good its recent promises of inflation-busting by increasing the the RBA cash rate by 0.25 per cent to 6.25 per cent. The 0.25 per cent increase will take the quoted bank Standard Variable Rate on a home loan to 8.07 per cent. It is the first time since August 2000 that the Standard Variable Rate has breached 8 per cent.

Whilst the interest rate increase is deemed to be necessary to contain inflationary pressure, caution will be exercised with the drought and unfavorable trading conditions continuing to ensure regional and rural Australia, outside of mining communities, are at risk of facing a recession within their own economies. New South Wales, Australia's largest economy will also argue that an interest rate increase will place further pressure on a slowing growth rate and fragile business confidence and will most certainly look to the Federal Government for relief.

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