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Government facing domestic and international pressure to increase interest rates

PETER THOMPSON: Our New York correspondent, Phillip Lasker, reports that the Australian Government is facing both domestic and international pressure to raise interest rates before inflation becomes a problem. He says the American markets are expecting to see some action within three weeks.

PHILLIP LASKER: Like it or not, the Australian Government and the Reserve Bank are not seen as inflation hardliners, determined to keep price pressures under control even if it means risking job growth, and partly for that reason they're under more pressure to prove they're prepared to put up interest rates. America suffered from the same problem and this year's financial market instability which caused President Clinton so much heartburn was partly due to the fact that financial markets didn't think his Administration or the Federal Reserve were being tough enough on inflation.

Yesterday's spectacular rise in job opportunities may be an aberration, but even if the figures aren't really that good, it's being seen as a strong message that the recovery is well and truly up and running and sustainable. The focus now turns to measures aimed at ensuring the recovery doesn't get out of hand and hopefully last longer.

Treasurer, Ralph Willis, was conscious of this on last month's visit to New York where he told financial markets what they wanted to hear: Don't worry, we'll take care of inflation; we'll act before it becomes a problem. So the next few weeks will be an important test of the Treasurer's credibility. A Vice-President with Bankers Trust in New York, Paul Byde, says the Treasurer has about three weeks to back his rhetoric with action.

PAUL BYDE: I think the authorities are well and truly on record as saying that, you know, an interest rate rise is inevitable. Certainly in the last month or so there has been a fair amount of statements come out from Treasurer Willis about the need for a tightening at some stage and it's coming sooner rather than later. I think the market's expecting one within two or three weeks.

PHILLIP LASKER: What do you think would happen if the markets' expectations weren't fulfilled, if authorities in Australia delayed any increase in interest rates?

PAUL BYDE: Well, I think the markets, not only international markets but domestic markets, would lose confidence in the Australian authority's ability to control inflationary pressures, and that would cause a sell-off in Australian bonds and higher interest rates overall.

PHILLIP LASKER: If authorities in the US increase interest rates in the next few weeks, as they're expected to do, how important is that for Australia?

PAUL BYDE: I think it's very important because Treasurer Willis has linked Australia's own tightening to tightenings in US overnight money rates. Next Tuesday is what's called a SONC(?) meeting in the United States. We expect that the United States will increase their overnight rates by 25 or 50 basis points.

PHILLIP LASKER: That's a quarter or a half a per cent?

PAUL BYDE: That's correct. And we think because Australia's own monetary policy scene has been linked to the US monetary policy scene that that could be a trigger point for an interest rate rise in Australia. So, starting from next Tuesday right out to early September, we would think that an interest rate rise could happen any day.

PETER THOMPSON: Paul Byde, who's a Vice-President of Bankers Trust in New York.