Financial markets are predicting another increase in interest rates towards the end of this year. That prediction has been endorsed by Ian MacFarlane, the outgoing governor of the Reserve Bank of Australia, when he appeared before the House of Representatives economic committee on Friday. Hia acount is that the economy is running close to full capacity-- capacity constraints are everywhere (eg., skill shortages, infrastructure) ---whilst the underlying inflaton is just below 3%. The latter is being fuelled more by the Howard Government's consumption boosting tax cuts than the state's infrastructure spending.

However, it is not obvious that Howard and Costello will resist the temptation to spend extra revenue when it comes to the 2007 pre-election budget, despite the Reserve Bank's plan to slow the economy meaning higher unemployment in Sydney and Melbourne, which in turrn, forcing people to move to the boom states where labour is scarce. That means more mortgagee auctions in Sydney which spill over into the houses of the still-employed neighbours crashing in value.