Rate rise possible late in 2007

The possibility of an interest rate rise this year has returned this week as the rebound in the Australian economy in 2007 takes most by surprise.

A strong rebound in economic growth over the last six months was confirmed in March quarter GDP, up 1.6 per cent. Over the last two quarters, the economy has been growing at an annualised rate above 5 per cent.

No surprise then in another bumper month of job creation in May with a net addition of 40,000 full and part-time jobs. Or in an unemployment rate that continues to find new lows, now just 4.2 per cent.

A couple of months ago it looked like the economy was nicely balanced with strong business investment pushing the economy along amid moderate consumer spending, a weak housing market and even weaker rural sector. It now seems the business, consumer and housing sectors are all producing strong growth.

Both the number and value of housing loan commitments continued their upward trend in April, although it's the purchase of established homes that is leading the way with construction lagging.

The big question for borrowers is, will this lead to renewed pressure on inflation, and in turn interest rates? The economy has proven surprisingly resilient to inflation in recent times but if current conditions continue they will make for a tough test of its anti-inflationary qualities.

The next big test for interest rates will be the next quarterly inflation figures (for three months to June) due out in late July – so no chance of a rate rise before August at the earliest. But even then, it's probably more likely that any inflation problem would not show up until the third quarter, putting any real chance of a rate rise off to November or later. What price an October federal election then?

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