The National Australia Bank has repeated its warning of two interest rises, starting with one next week.
In its September quarter survey of business confidence and activity, which showed no significant change, the bank said "we see as inevitable the need for the RBA to act and act quickly (on interest rates)".
"Not to do so, despite the Federal election, would be counter to their inflation mandate – and not to move cash rates up because of the election could well be interpreted as being more political than actually so doing.
"The dynamics are very much strong growth allowing business to widen sales margins together with increased flow on effects of higher oil prices and the drought, rather than a pickup in unit labour cost pressures.
"Clearly, the RBA will see this as unsatisfactory and will need to respond.
"Aggressive fiscal policy spending proposals (by both political parties) is, by adding to those demand pressures, only making the situation more difficult," the chief economist, Alan Oster, said in a statement accompanying the report which was released yesterday.
Only bad news about the global economy and/or financial markets would keep the RBA on hold on interest rates and given the inflation and economic outlook we doubt that just one adjustment will be enough.'
"Hence we expect, that, as well as the November rate rise of 25 basis points to 6.75%, the RBA will further increase cash rates by another 25 basis points to 7% in February 2008 – when the December quarter CPI confirms the extent of the near term inflation problem.
"In NAB's forecasts, these adjustments together with the higher Australian dollar should just be enough to temper demand and bring the inflation track back into the target range by late 2008.
"However, it should be stressed that, even with a further 50 basis point rate rise, the RBA will then still maintain a strong tightening bias.
"At this stage, we expect the RBA to pause after the February adjustment to allow time to assess the impact of the tighter financial conditions. If demand has not shown signs of slowing as Nab expects, another 25 basis points rise in the cash rate could well be called for in mid 2008. (We rate this as a 40% chance).
"Clearly, any further additional fiscal expansion plans (announced by either party) would only add to the case for extra RBA tightening in mid 2008."
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The NAB report shows there's little sign of any slowing in the pace of growth that might ease pressure on capacity or on resources.
"Indeed the current readings for business conditions are consistent with on-going growth in private demand of around 4½ per cent in the year to the September quarter.
"Together with the rapid growth in public sector spending – and that is unlikely to slow any time soon, given the Federal election announcements by both major parties to date as well as budgeted State spending – total domestic demand (private and public) looks to have continued at the 5 per cent rate in the year to the September quarter.
"Employment and trading conditions were unchanged at very high levels as domestic activity strengthened and export sales continued to disappoint, while profitability edged marginally lower.
"As well as the strength in current business conditions, businesses have retained a very upbeat view of their prospects for the December quarter – with expectations only a touch below the record highs reported in the September quarter.
"That is probably not surprising given the strong levels of forward orders reported (up 2 points to a strong reading of +10 index points).
"Also consistent with this near term strength is continued high rates of capacity utilisation and a record propensity of firms reporting difficulties in finding suitable labour," The NAB said.
So, as we saw Monday confidence levels among Australian business still remain firm, although they have come off their highs of earlier in the year.
The full quarterly survey of companies by National Australia Bank (NAB) showed the business conditions index down by only 1 point to 18 due to some easing in profitability.
"The main message from the more comprehensive quarterly business survey for the September quarter is that business activity remains at very robust levels," according to Alan Oster.
"Together with the rapid growth in public sector spending – and that is unlikely to slow any time soon given the Federal election announcements by both major parties to date, as well as budgeted state spending – total domestic demand (private and public) looks to have continued at the 5% rate in the year to the September quarter."
The NAB survey showed that conditions in mining, property and business services improved significantly while transportation, finance and agri-business were weaker.
Capacity utilisation, which is studied closely by the Reserve Bank, was steady around record highs of 83.2% and firms were reporting difficulties in finding suitable labour which is a situation mostly unchanged from the previous quarter.
The report shows that between the June and September quarters there were, however, some significant changes in the relative strength of the various sectors.
Mining, property and business services improved significantly, transportation (probably reflecting recent higher oil prices), finance (reflecting turbulence in global equity markets and higher funding costs from the sub prime crisis) and agribusiness (the failure of follow up rains) all reported much weaker outcomes.
"By economic region, there was little relative change on the mainland states – with Western Australia reporting the strongest and NSW still the weakest. There was significant improvement
