Rates steady, but for how long?

The Reserve Bank will meet to discuss interest rates on Tuesday and while there is next to no chance of any move on rates in October, there is likely to be growing concern about whether steady rates can continue much into 2006.

There are signs that the sustained high petrol price may be starting to feed into price pressures elsewhere in the economy. Price rises of up to 8 per cent in dairy products announced by one major producer are an ominous sign. It may well have implications for interest rates next year. Fuel costs feed into many goods and services and have the potential to cause inflation to rise above the RBA's 3 per cent upper target limit. If that happens rates will go up.

While the prospects for economic growth still look good, our rosy growth-without-inflation performance may now be under threat. The next inflation figure for the September quarter, just ending, will be very interesting.

There is another possibility of course that could put downward pressure on rates. Retail spending is being closely watched as economists look for any signs of serious impact from high petrol prices and falling house prices. Any dramatic slowdown in spending would soon hit economic growth – a possibility that could potentially send rates down. Retail sales grew a moderate to healthy 0.6 per cent in August after some big swings in recent months. The Bureau of Stats estimates the trend in retail sales to be downward, however. But at this stage, the rates-up scenario is more likely than the rates-down.

Not least because consumer confidence still sees borrowing at relatively healthy levels. Credit figures bounced back strongly in August, growing 1.3 per cent as measured by the RBA, but probably just a correction from the weak July figure of 0.5 per cent growth. Housing credit, that is, home and investment property loans, grew 0.9 per cent during August compared to a 1.1 per cent average this year while personal credit grew 1.2 per cent. Business credit grew a bumper 2.1 per cent, but is always subject to volatile swings.