The Reserve Bank is set to make history by increasing rates on November 7, in a nightmare scenario for the Coalition just two weeks before the federal election.
The bank is expected to increase them again by a further 0.25 per cent shortly after the November 24 poll, bringing Australia's professional cash rate to 7.0 per cent within striking distance of the 7.5 per cent left by the outgoing Keating government in 1996.
The Reserve has never lifted interest rates during an election campaign and, until this year, had not even raised them during the year of a campaign.
The measure of inflation most watched by the bank, the so-called "trimmed mean" calculated by the Bureau of Statistics, came in at 0.9per cent for the September quarter, the second successive quarter it has done so. It is sharply more than the 0.5 per cent and 0.6 per cent reported in earlier quarters.
Soaring food and housing costs have the underlying consumer price index (CPI) now running at 3 per cent, which is at the top end of the bank's target range of 2 to 3 per cent. Rising food costs are being attributed to the drought and yesterday the Australian Chicken Meat Federation said escalating feed-grain prices would spark rises in chicken meat prices by 20 to 30 per cent from next month.
The other measure of underlying inflation calculated for the bank, the so-called weighted median, came in even higher at 1.0 per cent the worst quarterly result since 1991.
For the Reserve to take no action at its board meeting on Wednesday week the day after Melbourne Cup Day would be to invite a third successive such result and to concede it had lost control of inflation.
The knock-on from an official rate rise to a mortgage rate increase in the election campaign would be potentially disastrous for the Coalition.
The Government trails Labor by 16 points in the latest opinion polls.
It would be the sixth rate increase since Prime Minister John Howard went to the last election promising to keep rates at record lows.
It would increase the monthly repayment on a $400,000 mortgage by a further $67.
Mr Howard and Treasurer Peter Costello sought to play down the consumer price index figures yesterday with Mr Howard saying the headline figure was the lowest CPI on an annual basis since December 1999. Opposition Leader Kevin Rudd said the Coalition had failed in its 11 years in power to address the causes of inflation.
ANZ bank economists said the new figures "sealed the deal" for the November rate rise, the National Australia Bank said for the Reserve not to act would be "against its charter", and TD Securities said for the bank not to act would mean "unambiguously" that it was politically biased. TD Securities global strategist Stephen Koukoulas said, "Given that this is not the case and that the Reserve Bank governor Glenn Stevens is a man of the utmost integrity and professionalism, it is 100 per cent certain that interest rates will be raised at the next board meeting."
Westpac, NAB, ANZ and the Commonwealth Bank are all warning of the possibility of a further rise beyond November's.
Westpac told clients that given the Reserve board did not meet in January the only question was whether it would wait until February or do it in December.
Mr Costello said the headline inflation rates of 1.9 per cent for the year and 0.7 per cent for the quarter were "really right bang in the middle of the target range which the Government has set for consumer price inflation".
Then he conceded that "other measures of inflation, more technical measures, are up around the upper limit of the band".
The headline rates were artificially depressed by a change in the way the statistician accounted for the 30 per cent child-care tax rebate. Previously paid though the tax system, it was not regarded as reducing the price of child care, but since July it has become a direct payment and been incorporated in the measured price.
The change cut 33.4 per cent off the apparent price of child care in the figures issued yesterday, when in fact the price was broadly unchanged.
Bureau staff said that without the technical change the headline rate of quarterly inflation would have been 0.9 per cent rather than 0.7 the same as the Reserve's preferred measure.
Mr Costello would not be drawn on how the Reserve would react or whether a pre-election rate hike would sound the death knell for the Coalition, invoking instead the prospect of a recession if Labor was elected. "If we were to go back to union control of workplaces and go back to pattern bargaining and moving wages by awards from profitable to unprofitable sectors of the workplace, you would unleash such inflationary pressures in this economy as would end in recession, as has always happened in past periods of economic growth," Mr Costello said.
Mr Rudd said this was "a remarkable piece of political stagecraft by Mr Costello, Academy Award-winning in terms of avoiding responsibility."
Former Labor prime minister Bob Hawke labelled Mr Howard yesterday the worst economic manager in Australian history and accused him of "buggering" up the economy while treasurer in the Fraser government.
with AAP