Rates set to rise on high inflation figure

Interest rates are now almost certain to rise in the middle of the federal election campaign in early November following the release of figures this morning showing inflation increased by 1% in the September quarter.

The underlying consumer price index result of 1% exceeds market expectations of a 0.7% to 0.8% rise, and pushes the yearly measure of inflation to 3.1%, breaking the RBA’s inflation target of 2% to 3%.

Rising housing construction and rent costs, more expensive food and increased prices in the finance and insurance sector – in short, the drought and booming housing demand – are behind the figure, according to TD Securities senior strategist Joshua Williamson.

The result, he says, is that we are likely to see two interest rate rises in the next six months: a 0.25 point rise in the cash rate to 6.75% when the RBA meets on November 6, and a further increase in the first quarter of 2008.

And, Williamson says, the seismic impact a rate rise is likely to have on the politics of an election campaign, where tens of billions of dollars in promises have already been doled out, is unlikely to deter the RBA from acting.

“The RBA will not be at all reluctant. Governor Glenn Stevens has said the election is no barrier to a rate rise if it is necessary,” Williamsons says. “This result will be ringing alarm bells; it’s a very strong number and underlying inflation figures can be sticky – and if they’re not dealt with, can be hard to budge later on.”

The result also means borrowers could face a double whammy of rate hikes, with NAB chief executive John Stewart saying banks were likely to have to lift rates to compensate for increased costs stemming from the international credit crunch yesterday.

Stock and foreign currency markets have responded strongly to the announcement. The S&P/ASX 200 increased on the announcement to be up a full 1% to 6728.6 by 12.35pm. At the same time the Australian dollar shot up to US90.33c, well up on yesterday’s US89.12c close.