Rates to rise this week?

Interest rates may rise as soon as this week after last week's inflation and wages alarm bells. Sizeable jumps over the last three months mean the first half of 2000 has now brought real signs of inflation returning. And this is before the one-off impact of the GST.

The Reserve Bank (RBA) board meets on Tuesday and any decision to alter official rates will be announced on Wednesday morning.

While most analysts believe the RBA will keep rates on hold for now, there is a growing view that it might make a pre-emptory strike and lift rates by a quarter percentage point.

Average weekly earnings in the three months to May rose 1.4%, double the expected rise, for annual rate of 4.5%. This comes on top of yesterday’s Consumer Price Index (CPI) figures which showed a jump of 0.8 percentage points to 3.2% in the June quarter, taking the headline inflation figure above the target band of 2-3% set by the RBA.

While the underlying inflation rate (discounted for the effects of mortgage repayments) climbed to 2.8% and remains inside the target band, the RBA will be concerned over any continuing upward trend. It has already said that wage rises of 4.5% a year or more is an inflation threat.

If the RBA does act, a 0.25-percentage point rise from the current 6% will almost certainly be passed on to home loan borrowers by lenders, adding about $16 to the monthly repayments on a standard $100,000 home loan.

However, there is some evidence to suggest recent inflationary pressure may not be maintained. The full effect of last year’s 1.25-percentage point hike in rates is probably still yet to have its full effect on the economy while the immediate outlook for petrol prices (the biggest factor in the latest inflation figures) is downward.