Fed: Higher oil prices a threat to interest rates: Costello

AAP General News (Australia)
04-19-2006
Fed: Higher oil prices a threat to interest rates: Costello

By Shane Wright, Economics Correspondent

CANBERRA, April 19 AAP - Treasurer Peter Costello has warned an oil-price induced bout
of inflation could force an interest hike amid signs consumer spending may soon start
to wane.

With oil breaking the $US71 ($A95.77) a barrel mark this week, there is growing concern
that it will feed through to higher prices for everything from food to imported plastics.

So far producers have kept prices under control, with inflation at 2.8 per cent - just
shy of the top of the Reserve Bank's target range of two per cent to three per cent.

But Mr Costello said Australia was now experiencing an oil crisis similar to what occurred
in the 1970s, when soaring oil prices pushed up prices across the economy.

Mr Costello said he was confident businesses would continue to keep a lid on prices,
but if they did not, there would be wider repercussions for the country.

"We have to be absolutely vigilant that this oil shock does not set off a wave of inflation
because if it did we would all be punished a second time," he said.

"Not just punished at the bowser but punished a second time with inflation and the
commensurate monetary policy response."

Mr Costello said he had been surprised by how long petrol prices had stayed high.

"We hoped that this would be just a very short-lived thing but as month by month goes
by it continues," he said.

"This has lasted longer than probably anyone has expected."

There are also signs that the economy is going to struggle for the rest of the year,
partly as a result of the high, sustained petrol prices.

The latest Westpac-Melbourne Institute leading index suggests economic growth is going
to be below trend for the month ahead.

Westpac global head of economics Bill Evans said although there had been signs of a
rebound by consumers, this may not be long lived.

"The best analysis of this print of the leading index is that the early signs of a
strong recovery in consumer spending may not be sustained," he said.

There has been a string of economic releases suggesting the economy, particularly at
the consumer level, is regaining traction.

This has led to a number of analysts tipping an interest rate rise when the Reserve
Bank board meets on May 2 - a week ahead of Mr Costello's 11th budget.

But Mr Evans said those analysts may be wrong.

"The leading index is signalling that this strong run of data may not be sustained," he said.

"The (Reserve) bank is likely to take a prudent approach to policy by waiting to further
test the sustainability of the recent strong data."

And Australian industry Group chief executive Heather Ridout said manufacturers were
continuing to struggle.

She warned the high prices for Australian commodity exporters - now at record highs
- could simply not be sustained.

"If history and logic are any guides, our terms of trade will not remain at their current
levels indefinitely," she said.

"Different commentators quibble over the timing and the extent of the correction but
few will argue with the proposition that we will see a reduction in current prices as
miners increase supply - not least from within Australia."

AAP sw/jt/sd

KEYWORD: ECONOMY NIGHTLEAD

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