Is another rate rise likely? Economy round-up

Tomorrow’s consumer price index data will be likely to make or break Reserve Bank plans to lift interest rates when it meets early next month.

The market has priced in the chance of an interest rate rise at about 40%, but in part that reflects the wide range of predictions – from 0.7% to 1.3% – about what tomorrow’s CPI figure for December will look like.

Many economists, including the teams at Westpac and ANZ, believe the core CPI will come in at 0.9% tomorrow. The prevailing view is that a rise of 0.9% or above will be enough to trigger the RBA to lift rates.

But the massive market volatility being experienced at the moment means what would usually be a dead certainty – a figure of 0.9% tomorrow would equate with an annual inflation rate of 3.4%, well above the RBA’s 2% to 3% target band – is much more debatable.

In its Business Outlook for 2008, for example, Access Economics director Chris Richardson says that while he expects further growth to pump-up inflation levels, the global credit crunch means any assessment of the growth and interest rate outlook needs to be made with caution.

According to Richardson, all of Australia’s eggs are now in the China basket. The canary in the economic mine will be commodity prices – any serious drop off there, Richardson says, and the Australian economy could be in for a battering.

On the upside, Access says that the construction, mining, retail, and communications are all expected to perform strongly in 2008.

And Australian new car sales have carried on with their record performance in 2007, with 91,384 new cars sold in December 2007, representing a 1.1% increase on the November.

Compared to December 2006, sales of sports utility vehicles are up 19.9%, other vehicles 17.2% and passenger vehicles 2.1%.