Rise unlikely, Reserve prepares to help out

And as the international financial crisis intensifies, top staff have outlined the bank's willingness to provide emergency funding to a financial firm if its collapse would cause economic harm - as in the recent cases of Bear Stearns in the United States and Northern Rock in Britain.

The Reserve expects next week's official inflation reading to clock in at above 1 per cent for the June quarter, or 4 per cent annually, minutes from its most recent board meeting show. Economists believe that only a much bigger number could spur the Reserve into more rate rises.

Disposable household income has been flattening out, due to rising fuel and interest bills. Westpac yesterday was the last big bank to lift its standard variable mortgage rate, by 0.14 percentage points to 9.61 per cent from tomorrow.

The Reserve also believes that consumer spending could be under pressure from the falling sharemarket, as families trim expenses due to declining superannuation returns.

The board also discussed the West Australian gas crisis, which is estimated to slice 0.25 per cent from economic growth, the minutes, released yesterday, showed. On the other hand, tax cuts that took effect this month were likely to increase incomes by 1 per cent in the coming financial year.

Economists said the Reserve was signalling that rates were on hold for the near future. Macquarie's interest rate strategist, Rory Robertson, said: 'Not only is the RBA not going to hike again, but the case for a rate cut now is stronger than that for another hike."

Others said conditions had worsened in the two weeks since the board meeting. An economist with ABN Amro, Felicity Emmett, said: "Ordinarily the minutes provide a very useful and detailed update on the Reserve Bank's thinking, but this month they appear to have been overtaken by events as the incoming news since the July board meeting has been quite negative."

Also yesterday, the Reserve released a conference paper by Jonathan Kearns and an assistant governor at the bank, Philip Lowe, outlining the argument for central bank intervention to provide liquidity to troubled financial markets. Too often discussions of assistance were derailed by quick references to the dangers of "moral hazard", they said.

But if central banks were to help the market cope with a downturn, there were strong grounds for regulators to "lean against the wind" in the good times.

"If the public sector is to provide some form of systemic liquidity insurance - and inevitably accept a higher level of risk on doing so - the trade-off may be a tightening of supervisory requirements when things are good."