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<DIV><FONT face=Arial size=2><SPAN class=NewsStoriesHeader><FONT size=3><FONT
face="Times New Roman"><B>Fuel, trade trigger for rates
rise</B><BR></FONT></FONT></SPAN><FONT size=3><FONT face="Times New Roman"><SPAN
class=NewsStoriesByLine>By Paul Malone <BR></SPAN><SPAN
class=NewsStoriesDateLabel>Saturday, 15 July 2006</SPAN> </FONT></FONT><SPAN
class=StandardText><BR><BR><FONT face="Times New Roman" size=3>An interest rate
rise seems almost certain next month after soaring oil prices pushed Australia
to its 50th successive monthly trade deficit in May, boosting net foreign debt
close to a staggering $500billion mark. </FONT>
<P>Commentators are already speculating that strong home loan approvals and the
positive employment figures reported earlier this week have increased the
chances that the Reserve Bank will lift interest rates as early as next month.
<P>Canberra petrol prices jumped by more than 10c in two days yet again,
analysts blaming conflict in the Middle East, which has pushed crude oil prices
to record levels.
<P>Petrol was selling for about $1.32 a litre in Canberra on Tuesday but was up
to $1.45 a litre yesterday, while crude oil prices reached $US76.23 a barrel for
the first time. <!--sPubId=2-->
<P>The impact of high petrol prices on inflation also puts pressure on interest
rates.
<P>Australian Bureau of Statistics figures issued yesterday showed a May trade
deficit of $2.24billion, taking the deficit for the first 11 months of the
financial year to $15.6billion.
<P>At the end of the March quarter, net foreign debt was $493billion and the
continuing trade deficits are likely to see the foreign debt close to cracking
the $500 billion mark when the June figures are issued.
<P>Exports fell by 3 per cent and imports rose by 3 per cent in May. In a major
concern, exports of Australia's most important commodity, coal, slipped 5 per
cent, while exports of mineral fuels dropped 22 per cent.
<P>Pundits had been tipping a deficit of around $1.5billion, up from the
$1.1billion deficit recorded in April.
<P>The Opposition's spokesman on foreign affairs and trade, Kevin Rudd, said the
figures marked the longest uninterrupted period of monthly trade deficits since
the bureau's monthly trade series began in July 1971.
<P>"All this has occurred on Mark Vaile's watch as trade minister," he said.
"This is the half century that no trade minister wants to knock up."
<P>He said Mr Vaile had given Australia an $18.7 billion trade deficit in 2005,
a big contributing factor to Australia's $55billion current account deficit and
the record foreign debt. The persistent high trade and current account deficits
would place unnecessary upward pressure on interest rates.
<P>Acting Minister for Trade Warren Truss put the best spin on the figures,
saying Australia's exports had achieved their highest May level on record.
Imports had increased mainly because of more expensive oil and increased capital
imports as resources exporters invested to expand capacity. Of the increase in
the deficit during May, about $785million was due to a surge in oil imports and
a reduction in oil exports.
<P>Mr Rudd said Australia's foreign debt made the country a bigger credit risk,
and increased the premium that would have to be paid on interest rates.
<P>"By sustaining persistent deficits and borrowing more each year, Australia
becomes more vulnerable to changes in world economic conditions," he said. In
recent years, it had been easy to borrow money from overseas because some
nations, in particular, China, Japan and the oil exporters, had enjoyed large
surpluses and had been happy to lend to Australia. That willingness would not
last forever. Japan's flow of cheap yen to the rest of the world was starting to
slow.
<P>"If global financial markets decide that Australia is a bad risk and stop
investing such large volumes of foreign capital in Australia, there will be
downward pressure on the Australian dollar and upward pressure on import prices,
causing the Reserve Bank to raise rates to suppress demand and keep inflation in
check," Mr Rudd said.
<P>Commsec equities economist Andrew Mitchell said that if Australia couldn't
improve its trade performance with prices for commodities at record levels, it
did not bode well for the future.
<P>"As a resource-based economy in the midst of a resources boom, it is
astonishing that Australia has just notched up a record number of consecutive
trade deficits," he said.
<P>"While we wait for our resources sector to get capacity on line, there is no
guarantee that the terms of trade will not turn against us."
<P>The figures came as Prime Minister John Howard played down the threat of
inflation to the economy, saying soaring petrol prices should have a muting
effect.
<P>Most pundits believe the Reserve Bank will make up its mind on an August rate
rise when the inflation figures are issued on July 26.
<P>Any hint of growing inflation, on top of the low unemployment rate, signs of
life in the property market, and the Government's latest round of personal
income tax cuts, would be enough for the bank to move.
<P>But Mr Howard said he believed the high petrol prices were effectively
curtailing spending.
<P>He said factoring in the impact of petrol prices, could help "suppress
exuberant demand". - with AAP
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