Pre-poll Rate Rise Would Be A First

THE possibility of an interest rate rise smack in the middle of a federal election campaign and a momentous vote on the future of Australias second biggest retailer will dominate investors attention this week.

Both decisions are likely to occur against a backdrop of heightened global alert and possible sharemarket volatility caused by fears that the worst of the global liquidity crisis is yet to come. After plunging 2 per cent on Friday, the Australian sharemarket is expected to start the week on a more positive note as stronger-than-expected jobs data in the US cooled fears of a recession in the worlds biggest economy. A related modest rise on Wall Street on Friday will push the local bourse about 20 points higher at Mondays opening, says MFS chief executive Guy Hutchings.

But resource stocks are expected to weaken further on a mixed performance from base metals. And the entire local market could still be exposed to negative developments in the US and Europe where investment banks have been reporting massive write-downs linked to their exposure to subprime mortgage debt.

The main focus in Australia, though, will be on interest rates.

The local futures market is implying a 90 per cent chance that the Reserve Bank of Australia (RBA) will raise the official cash rate to 6.75 per cent from 6.5 per cent on Wednesday, the day after its monthly board meeting. Given the high possibility of a rise, the sharemarket would have already priced one in. Other commentators agree that a rate rise is likely, although CommSec chief economist Craig James says it is far from a "lay-down misere".

"(Reserve bank) Governor (Glenn) Stevens has again stressed that it takes a while for the full effects of interest rate changes to be felt across the economy," Mr James said. "So, its early days to assess the impact of the August rate hike."

In a similar vein, AMP Capital Investors chief economist Shane Oliver said continuing uncertainty about the global economy, the strong Australian dollar and rising levels of local mortgage stress were good reasons for the RBA to hold off on raising rates.

But worse-than-expected inflation data reported this month will most likely force the RBAs hand, Dr Oliver added.

Futures markets are increasingly pricing in the chance of a second, 25 basis point rate rise by next June, but Dr Oliver thought this was unlikely.

If the RBA increases rates on Wednesday, it will the first time the central bank has lifted them during a federal election campaign. Coles shareholders could also make history on Wednesday when they vote on a $20 billion takeover offer from industrial conglomerate and owner of the Bunnings hardware chain Wesfarmers Ltd. Also of interest, National Australia Bank Ltd reveals its annual results on Friday and Commonwealth Bank of Australia Ltd holds its annual meeting on Wednesday.

Last Friday, the Dow Jones industrial average rose 27.23 points to 13,595.10.

AAP

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