Yesterday’s Statement on Monetary Policy from the Reserve Bank has made another interest rate rise before the end of the year a virtual dead cert – and throws a spanner into election preparation.

After raising the official cash rate to 6.5% last week, the quarterly statement suggests rates may still go higher.

The statement says strong domestic economic conditions, including 33-year lows for unemployment, the booming resources sector and stronger-than-expected GDP growth, will put upward pressure on inflation.

The Reserve has raised its forecast of underlying inflation from 2.5% in May to 3%, and warns that with the Australian economy operating at near capacity levels, a more restrictive monetary policy setting is needed.

Market economists expect another rates rise before the end of the year. The main question is when.

The Reserve Bank Board will meet on four more Tuesdays before the end of year: September 4, October 2, November 6 and December 4. Outcomes of Board meetings are announced at 9:30am the following morning.

November is shaping up as the most likely date for an election, although some pundits suspect it could be as late as December 1.

And the November RBA Board meeting appears to be the market’s favourite time for a rise in rates.

The Electoral Act requires a minimum 33-day campaign, so a November announcement on rates is likely to occur during the election period.

The Government could try and get to the polls earlier – but a rates rise may not be too much of a negative.

Interest rate rises create winners as well as losers. And the government has taken comfort from yesterday’s ACNielsen results, which suggest the vast majority of voters believe interest rates would be similar or even higher if Labor had won in 2004.

They believe that voters feel they are better equipped than the ALP to contain, if not prevent, rate rises.

Some brave souls have even said the better voting intention figures in yesterday’s Nielsen are in part a result of the rates rise, that the threat of more difficult economic times scares voters back to the Coalition.

It’s a pretty mangy rabbit to pull out of the hat – but better than no rabbit.

Economic management has been the government’s strength, but continued good times have caused voters’ eyes to wander.

An economic scare could come in handy.

And yet again it reinforces the overall impression that the election will be a decision between economic management and the “It’s Time” factor.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey