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Reserve Bank hints at another rate rise -

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Reserve Bank hints at another rate rise

Broadcast: 13/08/2007

Reporter: Helen Brown

Less than a week after putting up the official cash rate, the Reserve Bank has raised its inflation
forecast and in doing so has paved the way for another interest rate rise.


TONY JONES: The Reserve Bank has raised its inflation forecast and in doing so has paved the way
for another interest rate rise. Less than a week after putting up the official cash rate, the
Bank's assessment of the economy shows one that will continue to power ahead into a new year. Helen
Brown reports.

HELEN BROWN: The latest Reserve Bank statement delivered a bit of a surprise - a higher inflation
rate that's increased speculation about an interest rate rise.

JOHN EDWARDS, CHIEF ECONNMIST HSBC: I think the very high probability they'll increase them again
at the end of this year or at the beginning of next.

HELEN BROWN: The Bank's pushed up its inflation rate forecast to 3 per cent for the year. Only
three months ago it was at 2.5 per cent and the new number's right at the top of what the
Government's comfortable with.

PETER COSTELLO, TREASURER: Our band is 2, 3 per cent over the course of the cycle. You'd have to
say the cycle is at its high point now. For it to still be within the band is quite exceptional at
that high point.

HELEN BROWN: It's a familiar story about a red-hot economy. The Bank says consumers are feeling
confident and retail sales will remain firm. And business is continuing to invest, buoyed by
domestic and international demand. The Bank also says inflation will hover around the 3 per cent
for 2008.

CHRIS RICHARDSON, ACESS ECONOMICS: The Reserve Bank has every reason to sound as though it may
raise rates again; it wants to talk down the amount of money that people are spending out there.
Consumers, businesses, and for that matter, how much the politicians might spend.

HELEN BROWN: And there could be more economic pressures next year, particularly if the rural sector
and house construction pick up as expected.

JOHN EDWARDS: All of those things are going to contribute to a somewhat stronger economy. I think
that's where the Reserve Bank is a little concerned.

HELEN BROWN: Last week the official cash rate rose to 6.5 per cent, the highest rate in almost 11
years. The next main measure of inflation will come in late October with a release of the Consumer
Price Index. The Reserve Bank board meets a couple of weeks later and if that number's strong
enough, it could prompt it to raise the rate again, quite possibly in the middle of an election

JOHN EDWARDS: There's no doubt they have the authority to do it, it does perhaps in the long run
undermine the legitimacy that the Government confers on them.

PETER COSTELLO: I'm not speculating on movements in monetary policy.

HELEN BROWN: The Reserve Bank wasn't alone last week as central banks around the world poured extra
money into their financial systems to quell some of the fears generated by trouble in the United
States home lending market. But today's statements hows that the Bank's at ease with the subprime
anxiety, saying slowing in some parts of the US will be offset by China's massive growth. Helen
Brown, Lateline.