Rates in check as election approaches

Any chance of further rates rises still sitting away on the horizon with inflation low and election uncertainty dominating. Business investment looks quite healthy with capital expenditure figures for the June quarter coming in at 5.8 per cent, above expectations. Businesses' plans for investment this financial year also look healthy with the recent run of solid investment results set to continue this year.

The sharply rising international oil price is now perhaps posing the biggest question mark for the Australian economy and local interest rates. No immediate impact on rates is likely, but maybe down the track. The oil price dropped back this week as concerns over global supply send the commodity on a volatile ride.

The price has spiked because of worries over future supplies rather than any sharp fall in current supply. From nudging $US50 a barrel last week, oil is back to $US43, still well up on the average of recent years and with no guarantees it won't continue to bounce around. At levels approaching $US50, the more the adverse impact on the economy as high fuel costs filter through to the prices of many goods and services.

This poses the danger of rising inflation which at first glance may suggest the RBA might be forced to push up interest rates to combat. While keeping the lid on inflation is the RBA's primary goal in setting rates, it's not quite that simple. Oil price spikes also hit economic activity as higher costs force businesses to scale back. So any sustained spike may retard the recovery in world growth and our own, an argument for keeping rates low.

On other indicators for inflation, things look more rosy. The Wage Cost Index, now the pre-eminent measure of wages growth, grew 0.8 per cent in June to be up 3.6 per cent over the last year. This is a modest level and below the level that would cause concern at the RBA.

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