Rates may rise during early election

RBA chief's warning over inflation may pose problems for Prime Minister during campaign.

THE next round of inflation figures could push the Reserve Bank into lifting rates in the middle of the forthcoming federal election / File

THE next round of inflation figures could push the Reserve Bank into lifting rates in the middle of the forthcoming federal election.

The bank held its official rate steady at 4.5 per cent yesterday for the second consecutive month, acknowledging that financial markets were increasingly uncertain about the outlook for world growth.

However, Mr Stevens indicated that the RBA believed the global economic recovery was on track, with growth around the long-term trend rate and even some key European countries showing recent improvement.

The big question before the bank is the prospect for inflation, with new figures for the June quarter to be released on July 28, just ahead of the bank's next scheduled board meeting on August 3.

Most analysts expect an election in late August or early September, with Prime Minister Julia Gillard calling the poll later this month or the first week of August.

Westpac chief economist Bill Evans said Mr Stevens' comment, following yesterday's board meeting, that the current level of rates was appropriate "pending further information" about local prices and demand was intended to give the bank the flexibility to respond to a poor consumer price figure during the election campaign.

"Short of a further substantial deterioration in the global economy, we think that a print of 0.8 per cent for the quarter on underlying inflation will be enough to trigger another rate hike," he said.

Mr Stevens earned the hostility of the Liberal Party by raising interest rates both immediately prior, and then in the middle of the 2007 election campaign.

RBS chief economist Kieran Davies said it was possible growing concern about global growth, European governments and local funding costs could lead the RBA to delay the next rate hike beyond August.

Read more about an election rate rise risking a Labor upset at The Australian.