In 10 days time the chances of the Reserve Bank board lifting interest rates has firmed to a 70-80 per cent chance, according to interbank futures rates and polls by Reuters and Bloomberg.

That’s after the surprise inflation figures for the June quarter which showed a higher than expected rise of 1.2 per cent, for an annual rate of 2.1%, the lowest for three years but well above all market expectations (It’s low because the high 1.6 per cent June quarter, 2006 rate has rolled off the base for comparison in the latest quarter).

And the fact that the NZ Reserve Bank lifted rates for a fourth time this year will make it a tiny bit easier to lift rates here. The Bank of England and The Bank of Canada have both increased their key rates this month and South Korea looks like following in the next couple of weeks.

The driver in the June quarter was the rising cost of housing (especially in the boom areas of Brisbane, Perth and Darwin) and the rising cost of rent (especially in NSW). That makes the Labour Party inspired talkfest in Canberra about housing affordability interesting, but a waste of time because the real reasons won’t be tackled: that combination of personal aspiration, greed and the grasping nature of state and local government, especially in NSW and Victoria.

But the timing of the higher than expected CPI, the looming Federal election and the way the ALP is leading in opinion polls suddenly gives the professionals in the Reserve Bank a chance to make a very important point about their independence from the Government of the day and the Howard Government appointees on the board by pushing up the cash rate by 0.25% to 6%.

That would make yet another rate rise under the Howard Government since the 2004 Federal Election.

Another who may be looking to make a point is Ken Henry, the Federal Treasury Secretary, who is also a board member and who has been discovered to have been speaking his mind lately. Such as last April when someone leaked his forthright comments about how Treasury wasn’t consulted on the Howard plan for the Murray darling rivers, and how he also warned about the dangers of pork barrelling in an election year.

But the most interesting tack will be that taken by the professionals at the bank, from Governor Glenn Stevens down.

Here’s a story from last year which they will all remember word for word on the way the bank almost went public when the Howard Government used its reputation in vain in the 2004 election campaign to beat Labour up on rates.

Like treasury, the RBA is an institution with a long corporate memory. The opportunism of the Howard Government and the Liberal Party in 2004 still rankles.

The former governor pointed out in another interview last year that interest rates were higher in 1982 than they were under the ALP governments. The Federal treasurer in 1982 was John Winston Howard, a point the current treasurer made to the authors of the new Howard biography.

And then there’s the solid and continuing lead the ALP has in the opinion polls. What better way to assert your independence than to stick up rates on August 7, and also send a message to the ALP that it could be done to them if they win Government?

And finally some solid analysis from Goldman Sachs JBWere economists overnight has exposed the Howard Government’s foolishness in not taking housing problems seriously.

This is what they told clients this morning:

The 2Q CPI is a ‘fairer’ gauge of underlying inflationary pressure after the statistical anomalies in the 1Q data were corrected. The emergence of a chronic undersupply of established housing is becoming increasingly apparent in consumer prices as home purchase costs and rents (the two largest items in the CPI basket) take over the baton as the driving force of inflation. (Our emphasis).

Globally traded prices are showing signs of increase with the sharp rise in the A$ in the June quarter failing to prevent traded goods and services prices from rising.

Only for a moderation in government administered prices underlying inflation would have been higher still, however, it appears to us as a false trend given well flagged rises in utility charges in 2008.

The Australian economy is an economy expanding at a pace well above its productive ability with few signs of spare resources to draw upon. Broader financial conditions cannot yet be labelled as restrictive and there are few signs that monetary policy is restraining demand for credit and asset prices. Moreover, the fiscal backdrop remains highly procyclical suggesting a clear need for the RBA to lean against the cycle.

We continue to expect the RBA to hike in August and flag that the risk of a February hike is rising. At this stage we place the risk of a further hike in early 2008 at slightly less than 50%.

If that happens and there’s a change of government, it would be the first rise under Kevin Rudd.