Rate Rise Could Be Stitch In Time: Pm

The Age

Saturday October 28, 2006

By MICHELLE GRATTAN and NASSIM KHADEM With AAP

JOHN Howard yesterday appeared to support the Reserve Bank raising interest rates early next month, declaring "a stitch in time" could avoid a much bigger increase later. But the Prime Minister later said he was not endorsing the rise.

Mr Howard told 3AW that if there wasn't a rate rise after this week's annual 3.9 per cent inflation figure, inflation could go higher, requiring a bigger rate rise down the track.

"Now that is not in anybody's interest. It's a question of . . . a stitch in time saves nine. That could well be the philosophy of the Reserve Bank, and if it does, it will be hard to criticise that."

Later, on his second day touring drought-ravaged areas of NSW he told reporters: "I'm simply acknowledging that the Reserve Bank will make the decision and I also make the point that controlling inflation is very important."

The Reserve, meeting on November 7, Melbourne Cup Day, is expected to increase rates by 25 basis points, bringing the cash rate to 6.25 per cent. Economists are not ruling out a further rise early next year.

Mr Howard's comments came as the nation's commodities forecaster, the Australian Bureau of Agricultural and Resource Economics, estimated the drought will wipe $6.2 billion from farm production this financial year and reduce economic growth by about 0.7 per cent.

Mr Howard said we were living in a strong "exuberant" economy outside of the farm sector, and all that activity had produced some inflationary pressure.

He said the Reserve Bank might well say the best thing it could do for Australia was to dampen that "inflationary exuberance a little now rather than let it run".

His willingness to comment contrasted with his response before the August rise when he refused to speculate.

Opposition Leader Kim Beazley said that if rates went up - which would be the fourth rise since the election - it would be "John Howard's fault".

HSBC Bank chief economist John Edwards said that while financial markets paid little attention to what politicians said about rate rises, Mr Howard's views were in sharp contrast to Treasurer Peter Costello's earlier this week, made before the inflation numbers were released.

Mr Costello had said that it was more important for the central bank to look at inflation over a 12-month period. -- With AAP

© 2006 The Age

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