Finance

Rates risk in inflation figure: Economy roundup

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We know the Reserve Bank of Australia expects a high consumer price index result tomorrow. But what kind of figure would be too high – high enough to prompt another interest rate rise?

The market expects a headline CPI for the March 2008 quarter of about 1% and an underlying figure – the crucial result for the RBA’s purposes – of 0.9%.

That would give us an annual inflation figure of about 4%, well above the RBA’s 2% to 3% target band, but even that is not considered the sort of figure that would see another rate rise.

So what would? According to ANZ bank, an underlying result of 1.3% or higher would prompt the RBA to lift rates again. That kind of result is unlikely, but then yesterday’s Producer Price Index – a measure of wholesale prices – came in up 1.9%, well above market expectations of a 1% rise.

Of course, nowadays it’s not only RBA decisions that drive interest rates higher. In comments reported today, Commonwealth Bank chief executive Ralph Norris says the amount the bank has to pay to obtain funding on global credit markets “gets more expensive every day”.

The CBA has the largest domestic deposit book of the Australian banks, so if it is feeling the squeeze from higher funding costs you can bet the rest of the banking system is too.

And speaking of bad news from banks, the markets have dropped back after yesterday’s strong performance – the S&P/ASX200 closed up 3.14% – thanks to a weaker than expected result from the Bank of America.

At 12.20pm the S&P/ASX200 is down 1% on yesterday’s close to 5542.9, while the US Dow Jones Index closed down 0.19% to 12,825.02 overnight.

A key reason for the backward move on both indices was the Bank of America’s announcement of a 77% drop in earnings for the March 2008 quarter to $US1.21 billion, well below market expectations.

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