INTEREST RATES TO BE LIFTED NEXT WEEK

 

The Reserve Bank is preparing to lift interest rates, declaring in its latest board minutes ''rates will need to rise'' and that it cannot ''wait indefinitely''.

The unusually hard language follows an October board meeting that was ''finely balanced'' with three of its nine members absent, including the academic Warwick McKibbin, who is believed to support pushing up rates. Increasing the chance of a rise at the next meeting on Melbourne Cup day will be inflation data due out next Wednesday, days before the board meets. The minutes say rates will have to rise ''at some point'' as inflation climbs as a result of pressures flowing from the mining boom.

But ''the timing'' of the rate rise is a matter of judgment. ''While the board recognised it could not wait indefinitely to see whether risks materialised, members judged that they had the flexibility to do so on this occasion,'' the minutes say. ''It would be appropriate to hold the cash rate steady for the time being pending evaluation of further information at the next meeting.''

Tipping the balance in favour of waiting were unexpectedly weak business borrowing in July and August and the higher Australian dollar, which would itself put downward pressure on inflation.

But the Reserve Bank believes the effect of the high dollar on prices will be only temporary and notes that our currency is fairly steady against a broad basket of currencies, the US dollar being the key exception.

A pre-Christmas interest rate rise of 0.25 points would lift the Reserve Bank's cash rate to 4.75 per cent. If banks  took the opportunity to further widen their margins the standard rate would approach 8 per cent for the first time since the onset of the financial crisis in 2008.