Fed: Risk of rate rise deepens after week of buoyant data

AAP General News (Australia)
04-13-2007
Fed: Risk of rate rise deepens after week of buoyant data

By Colin Brinsden, Economics Correspondent

CANBERRA, April 13 AAP - Prime Minister John Howard says the coalition is still the
government that will deliver a low interest rate environment, even though there have been
four increases since the last election.

And economic data released in the past week suggests there is a growing risk there
will be a fifth interest rate hike before long, a worry for the government ahead of this
year's election in either October or November.

Mr Howard said yesterday's drop in the unemployment rate to a 32-year low of 4.5 per
cent does not automatically mean interest rates will have to go up again.

"I think some of the market reactions are simplistic," Mr Howard told Southern Cross radio.

He said that increase in interest rates will only happen if low unemployment leads
to high wages throughout the whole economy, leading to an increase in inflation.

However, a drop in the unemployment rate is only part of the rate story which has sent
the Australian dollar rocketing to a 17-year high above 83 US cents today, and seen interest
rate markets price in a 64 per cent chance of a rate rise next month, up from 60 per cent
yesterday.

Not only did housing finance, job ads and business survey data - along with the labour
force report - this week demonstrate buoyant conditions in the business and household
sectors in February and March, they also point to further strength in domestic demand
in the months ahead.

The Australian Bureau of Statistics also released lending finance data for February
today, which shows total new commitments - housing, personal, commercial and lease finance
- rising by 10.0 per cent in February, the highest growth rate in nine months.

This follows a 7.5 per cent rise in January.

"Against a backdrop of capacity constraints and labour supply shortages, and with core
inflation at the top of the RBA's comfort zone, the risks to the inflation outlook have
deepened," ANZ economist Ricki Polygenis said.

ANZ expects an interest rate rise next month.

Key to a rate rise at the Reserve Bank of Australia's board meeting on May 1 will be
the outcome of the first quarter consumer price index on April 24.

Mr Howard said it was for the RBA to make the final assessment on rates and make that
largely based on views on the level of inflation.

"I don't like interest rates going up because of the impact they have on borrowers,"

Mr Howard said.

"I stand by what I said before, that a coalition government will always deliver lower
interest rates than a Labor government, I certainly do stand by that."

Mr Howard, well behind Labor leader Kevin Rudd in opinion polls, declined to comment
on what election sweeteners would feature in this year's budget, to be delivered on May
8.

"There are always some surprises. You can expect a budget that is responsible, clearly
a budget that looks to help people.

"But you don't help people by going back into the red and there will be a strong surplus."

His Treasurer, Peter Costello, said yesterday tax cuts are preferable to extra government
spending for delivering economic growth.

However he refused to be drawn on whether there would be another round of tax reductions
in the May budget.

AAP cb/mss/mn

KEYWORD: ECONOMY NIGHTLEAD

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