Saul Eslake, Chief Economist, ANZ Bank

Interest rate rise – Yes or no? I think there is a strong case for putting rates up, but I’m not convinced it is an overwhelming one, so I’ve decided the probability is 45%. If I was forced into a yes/no answer, that’s a no. That said, I won’t be surprised is they do go up.

Why? There are three reasons. One, I am not necessarily convinced that this CPI figure on its own represents the beginning of an upward trend in inflation that the RBA needs to respond to by raising rates. Point two is noting the turmoil and uncertainty in global financial markets. And three, although I have no doubt at all that if Glenn Stevens thinks rates should go up that’s what he will recommend to the board, we need to remember that it’s the board not Stevens that decides whether rates will go up. And the board may be a little more politically sensitive than Glenn Stevens.

What influence will federal politics have on the decision? Stevens spelled it out the RBA’s position very clearly this year. He specifically said that if it needs to be done in August this year it will be done. The only time that the RBA might feel constrained by the political process is when the writs have been issued. The RBA has perhaps got itself into a position where the only months it seems to raise rates are the months after the quarterly CPI. So they might go now because the next logical month to go will be November, but that is highly likely to be in the formal part of the election campaign, which in turn would mean they wouldn’t go until February. If they really feel inflation is a problem, to wait six months before doing anything would be the wrong decision.

Shane Oliver, Head of Investment Strategy & Chief Economist, AMP Capital Investors

Will rates go up? My reading is that rates will probably rise, but what I think they should do is hang off for a month. There’s enough economic data to get the bank over the line and the financial market turmoil hasn’t gone far enough to put them off. But I’m only 55% confident they will put rates up.

What is driving the RBA decision? There are two factors. The first is the inflation figures for the June quarter which came in worse than expected. The other factor is that we’ve seen a run of strong economic data over the last six months, highlighted over the last week with robust data for retail sales, building approvals, private sector credit, and a couple of business surveys. Inflation has started to move back up again, combined with continued strength in the economy, which has got economists, including myself, thinking that a rate rise is likely.

What’s the capacity of the RBA to resist the political environment? Glenn Stevens is on record saying that they will do what has to be done, and the idea that you can’t raise interest rates in an election year is nonsense. That said, I think the Bank would prefer not to raise rates too close to an election. If they have an inkling that they want to raise rates they might want to get it out of the way now because September might be too hard.

Dr Frank Gelber, Chief Economist, BIS Shrapnel

Will rates go up? I’m not sure, and betting on it is a mug’s game. It’s not about one interest rise. It’s really about how they play it over the next few years.

What are the pressures on the RBA in making its decision today? There’s the bad CPI result, but the real problem that we have to address in the next few years is wages. The danger is that we are running out of skilled labour and we are going to see a very strong wage rise leading to inflationary pressure. We had a very tight, recent award wage increase, so wages aren’t the issue right now. But short term, we’ve seen a significant rise in the dollar over the last six months which has taken a lot of the heat out of inflationary pressure and it takes time for that to become a decline in inflationary pressure. In a way, I think we’ve got a bit of breathing space until the first part of next year in terms of the dangers of runaway inflation. So it’s not really about what happens now. It’s not an issue for me until inflation starts to filter into wages.

What influence does the state of political play have on this decision? In bending over backwards to try to make their decision non-political, the RBA will make it a political decision. But the reality is that we’ve got a speed-limit on this economy because of the lack of skilled labor and that will last indefinitely, or at least until we have the next major recession. So this is an economy with an inflation bias, long term. It’s about how they play the game through this whole period that we have an inflation bias, and they have to make sure they do that without turning the economy to recession, which is the traditional way of fighting inflation. The reason is people are a lot more geared now and it will hurt a lot of people. The thing that will really hurt people is an inability to service their debts. The really crucial thing for both the government and the Reserve Bank is to avoid a recession.

Michael Knox, Chief Economist and Director of Strategy at ABN AMRO Morgans

Will rates go up? Probably, but they shouldn’t. The inflation number was a little bit higher recently, and it’s the case the domestic demand is growing, but when we look at the circumstances of where inflation is and where the budget balance is in Australia, there’s an argument that rates don’t need to go up.

Will pork barrelling place significant pressure on interest rates in the lead-up to the election? They’ve not referred to it as a problem. We know that the budget was balanced at budget time. The budget surplus tends to be under-estimated at budget time. That’s the experience of the last four years. In fact, it tends to be about half a percent higher than is actually predicted at budget time. The economy is growing strongly which generates a lot of tax revenue which means they can spend a lot but still keep it in surplus. So, no. I don’t think so.

Richard Gibbs, Chief Economist, Macquarie Bank

Will rates go up? Yes, I think that there is an 80% chance that they will go up.

Why? Firstly, it’s the recent figures on inflation. Put prior to the release of the June quarter data the Bank said it had time to assess the behaviour of demand on the economy. That has pretty much put the Bank on the back foot. Secondly, the income side of the Australian economy continues to be very strong. It’s coming from ongoing strength in the labour market. We have households with income and stability of income. We also have the ongoing strength in the terms of trade. Both the RBA and the Treasury have been forecasting a decline in the terms of trade but that hasn’t happened yet and doesn’t look like happening soon. Then we have state and federal governments injecting money into the economy, and since the start of the year households are now more comfortable spending. When you’ve got a capacity constrained economy and people are starting to spend more something has to give and it is usually prices.

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