The official interest rates is at a 12 year high at 7.25 per cent. The home loan rates is between 9 and 10 per cent. The inflation figures were released this week - the underlying inflation in the year to June grew at 4.4 per cent, which was well above the RBA’s 2-3 per cent target.

Inflation and interest rates are linked - read my post about how inflation affects interest rates. Here is a summary of what I wrote in that post -

• when people are spending more, inflation rises
• inflation has to be controlled
• inflation can be controlled by reducing spending
• spending is reduced by rising interest rates
• higher interest rates, means less disposable income, means less spending power, means inflation being controlled.

The current inflation rate is the highest since 1991. But don’t panic. Theoretically though this means that the rates have to be raised to control inflation, the consensus among many economists is that RBA might leave the rates unchanged for the rest of the year.

The main reason the rates might be left unchanged is because there are signs showing that the consumer demand is slowing - mainly because of rising petrol prices, higher interest rates and rising food prices.

Petrol prices is the main contributor to the current high inflation figures. Consumer spending has been a lesser contributor. And let’s not forget the recent increase in interest rates by banks (RBA did not rise rates, banks acted independently). This increase in rates acts as a de facto policy tightening.

Here are quotes from some leading economists and what they believe will happen to interest rates:

Westpac chief economist Bill Evans - “The RBA would get some ’satisfaction’ from yesterday’s data, adding there was ‘no chance’ of another rate hike in this cycle. “

NAB chief economist Alan Oster - “The next move on interest rates will be a cut in February, but if things get bad as the economy slows that rate cut may come even earlier.”

Citigroup chief economist Paul Brennan - “It is still early days, but there is also a growing possibility the economic downturn is going to be deeper than the RBA wants - which may force a rate cut in the first quarter of 2009.”

CommSec chief equities economist Craig James expects rates to stay on hold but warns the RBA’s slowing of inflation might be derailed if there was another strong jump in petrol prices in coming months.

The above quotes were from the article - http://www.news.com.au/heraldsun/story/0,21985,24067636-664,00.html

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