Rate Rise May Be On Cards

The Age

Wednesday September 5, 2007

Josh Gordon, state economics reporter

HOME buyers could be stung by another interest rate rise before the federal election and amid fresh warnings that the economy is dangerously close to overheating.

As the Reserve Bank board met in Perth to discuss interest rate settings, Bureau of Statistics figures showed the economy - fuelled by booming government spending and private sector investment - was expanding at its fastest annual pace in three years.

In the three months to June 30, the gross domestic product rose 0.9 per cent after scorching growth of 1.6 per cent in the March quarter.

This lifted the annual rate from 3.8 per cent to 4.3 per cent, the strongest since the 2004 June quarter.

Prime Minister John Howard said this was stunning given that agricultural production had been seriously affected by drought.

But it could be a mixed blessing for the Coalition, which has staked its re-election hopes on its ability to sell its economic credentials.

Economists warned the economy was racing at an unsustainable pace, boosting the odds the Reserve Bank will increase interest rates this year in a bid to control inflation.

"Clearly the economy is running too fast," Westpac senior economist Andrew Hanlan said. "We certainly see a need for higher interest rates."

Economists and investors are adamant there will be no interest rates announcement this week. But growing numbers warn of an increase this year, probably after the next inflation data due late next month.

This means an increase would be only days before polling day if Mr Howard calls the election for November.

The stronger-than-expected growth was driven by a big surge in business investment as companies raced to relieve production bottlenecks and capitalise on the resources boom.

Investment soaks up a near-record 28 per cent of GDP and new business investment is up by almost 115 per cent in the past six years.

Treasurer Peter Costello said the surge would boost the productive capacity of the economy, suggesting this would relieve pressure on inflation and interest rates.

"We are raising the speed limits of the Australian economy," he said.

The bureau's figures showed big spending by the Federal Government. In the year, investment spending leapt by a massive 54 per cent, and grew by 42 per cent in the June quarter alone.

Victoria's growth performance was more subdued. State spending grew by a solid 1.5 per cent in the quarter and 4 per cent in the year, compared with growth of 4.3 per cent in NSW, 9.5 per cent in Queensland and 9.1 per cent in Western Australia.

Mr Howard said the figures refuted Labor claims productivity was down under the Coalition and that growth was based solely on the resources boom.

Productivity - output for each hour worked - increased by 2.9 per cent, the best result for three years.

Shadow treasurer Wayne Swan said the measure of inflation in the figures was rising at the fastest quarterly pace for seven years.

"This outcome suggests inflationary pressures may be gaining momentum and heightens the need for policies to put downward pressure on inflation after nine consecutive rate rises, despite Mr Howard's promise to keep rates at record lows," he said.

Households appear to be repairing their battered balance sheets after spending above their means for years. For the first time since mid-2002, the household savings ratio is positive, meaning spending is not higher than disposable income.

© 2007 The Age

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