An election hike?

It’s fair to say that July 28 is a pretty important day for Australia’s economists, investors and politicians.

That is the day the Australian Bureau of Statistics will release its latest Consumer Price Index data for the June quarter, which will give us an official indication of how inflation is tracking.

Today’s minutes from the Reserve Bank of Australia’s July board meeting shows that Governor Glenn Stevens is ticking off the days until July 28 too.

“Members noted that the coming month would see… an updated reading on domestic prices,” the RBA said in its minutes.

“This was expected to show further moderation in the year-ended underlying rate, although underlying inflation was likely to remain in the top half of the target range over the period ahead. Headline inflation was expected to rise, owing to the effects of some tax increases, with the year-ended increase in the CPI rising above 3%.”

“The important question for the Board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation.”

Reading between the lines, the RBA has confirmed what economists have been telling us for awhile now – if inflation looks like remaining stubbornly outside the RBA’s target band of 2-3%, then it seems highly likely that we are going to get another rate rise, and possible as early as August.

And that won’t be good news for Prime Minster Julia Gillard.

While Labor did a very good job of steering Australia through the GFC, the Coalition has already started trying to hammer Gillard on the idea that Government debt is putting pressure on interest rates.

While that’s probably stretching the truth a bit – Australia’s Government debt is so low relative to other nations that we’re not likely to have a very big impact on global lending rates – a rate rise in the middle of the election campaign could give Abbott’s claims more weight.

Ironically, the saving grace for Gillard could be the ongoing debt problems in Europe.

The RBA minutes also stress the uncertainty this has created, and state the RBA will closely watching the release of the results of “stress tests” on European banks, which are to be released later this week.

If the results suggest the European banks are in trouble, the RBA might be hesitant to hike, regardless of the inflation data.