Rates unlikely to go up… this time

The Reserve Bank of Australia is unlikely to switch from its “watch and wait” mode to increase interest rates when it meets tomorrow, market watchers say.

Australia’s major banks are unanimous in the view that ongoing uncertainty about the impact of the international financial crisis and the health of the US economy will see the RBA maintain the cash interest rate at 6.50% tomorrow.

The RBA will also be keeping a close watching brief on the spending pledges of the major parties as the federal election approaches.

According to The Australian Financial Review, the major parties have already racked up promises worth close to $19 billion, with Labor’s promises currently worth $9.8 billion and the Coalition’s $9.2 billion.

Given that we are yet to even enter the election campaign proper, the RBA will now doubt be wondering just how much cash there will be sloshing around the nation by the time Australians cast their vote, likely to be in early to mid November.

Any inflationary pressure that are generated by big campaign spending will be counteracted by an existing counter-inflationary influence, however – the high Australian dollar.

At 12.40pm the Australian dollar is trading at a very strong US88.90c, after reaching a 18 year high of US88.93c in weekend trading.

The higher the Australian dollar, the harder it is for exporters to compete, effectively reducing their contribution to an overheating economy. And if interest rates go up, that is likely to push the Australian dollar even higher.

Will exporters have to pay for the profligacy of our politicians? We won’t have to wait long to find out.