THE Reserve Bank is expected to ignore market turbulence and raise interest rates this week, with economists fearing a pre-election spending spree in the coming months will only heighten pressure on inflation.

The sharemarket is set to tumble when it opens today, following more steep falls on Wall Street on Friday. Futures markets are indicating the S&P/ASX 200 may drop as much as 2 per cent, extending last week’s slide on worries about mortgage defaults in the US prompting a wider credit squeeze.

Just two out of 24 economists surveyed by Reuters believe rates will stay on hold. Most believe higher than expected inflation numbers and borrowing in June will force the bank to raise rates by 25 basis points at tomorrow’s meeting. The outcome will be revealed on Wednesday at 9.30am. Until the release of the June-quarter consumer price index, financial markets and most economists had expected rates to remain unchanged. But an underlying reading of 0.9 per cent in the quarter (expectations were for 0.7 per cent increase), shifted views.

Financial markets estimate a rate increase at about a three out of four chance. Most economists say with the annual underlying measures sitting at the top of the bank’s target rate of 2 to 3 per cent, a rise before the election is inevitable.

The consensus is the bank board would prefer to get the matter out of the way in August. “The bank will try and ensure that it’s not drawn into the political debate,” said Macquarie Research head of economics Richard Gibbs.

“They are more inclined to act in August than September and with it still looking like the timing for the election is early November, I think that’s a reasonable distance.”

But another rate rise would undoubtedly feature as a dominant election issue, making it the fifth since Prime Minister John Howard’s 2004 election promise to keep interest rates low.

A rise of 0.25 percentage point would take the cash rate to 6.50 per cent, adding $32 a month to the cost of servicing a $200,000 mortgage, and worsen the housing affordability issue.

ANZ chief economist Saul Eslake says with the Government lagging in the polls, it will continue to dish out money to lure voters.

A case in point was Mr Howard’s announcement last week to take over funding for Devonport’s Mersey Hospital in the marginal Tasmanian seat of Braddon at a cost of $45 million.

While the board will be concerned about the inflationary pressures this spending may produce, Mr Eslake says he believes rates will remain on hold until after the election.

He says inflation, although higher than expected, is not high enough to justify a rate rise. He says the world economy and financial markets are volatile, and “the Reserve Bank board, as distinct from the executive led by (governor) Glenn Stevens, may be weary of what will be a highly politically charged decision so close to an election”.

St George head of economic research Steven Milch said recent market falls would reduce the likelihood of an August rate rise. He says he believes they will more likely wait until February because at present “inflation isn’t a problem”.

“Yes the CPI was higher in the quarter, but it followed two very favourable quarters. We don’t need to overreact,” he said.

Mr Howard and Treasurer Peter Costello believe the underlying inflation is well within the target range.

Companies reporting results this week include News Corp on Wednesday, Telstra and Coca-Cola Amatil on Thursday, and Lihir Gold on Friday.

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Syria is expected to rebuff an invitation from the US to attend a grand Middle East peace conference later this year because it does not believes that either the Bush administration or Israel wants to reach a comprehensive regional settlement.

President Bashar al-Assad has made no comment on Sunday’s call by Condoleezza Rice, the US secretary of state. But diplomats said yesterday the Syrian foreign minister, Walid al-Mouallem, will decline the offer when he holds talks at the UN this week - unless he receives ironclad assurances that the event will be more substantial than currently appears likely.

“Syria attaches more importance to the content than the formalities,” a senior official said. “We have no interest in going just to have our photos taken.”

The conference, centred on the Palestinians and Israel, is expected to be held in the Washington area in mid-November, but the details of the agenda and wider Arab attendance remain uncertain.

Egypt and Jordan, which have peace treaties with Israel, are likely to go. But Saudi Arabia, godfather of the Arab peace initiative, is sending mixed signals. The Syrians and Saudis have been at loggerheads for months over Palestine, Lebanon, Iraq and relations with Iran.

The 22-member Arab League, facing a damaging split, has warned it will not take part without a moratorium on Israeli settlement activity on Palestinian territory.

Ms Rice is reportedly seeking to widen the agenda of the conference. According to the state department, she has insisted that the event will be “serious and substantive” and will discuss the “core issues” of the conflict - borders, the status of refugees and the division of Jerusalem.

The last time Syria attended a Middle East peace conference was at Madrid, convened in a burst of optimism after the 1991 Gulf war. But its negotiations with Israel ended without agreement in 2000. Israel and the US are now demanding Syria end its support for Hamas, the Palestinian Islamist movement, which has offices in Damascus, and Lebanon’s Hizbullah.

Ms Rice said: “We hope that those who come are committed to helping the Israelis and the Palestinians find a way through. And that means renouncing violence, and working for a peaceful solution.” Sidestepping US demands, the senior Syrian official said: “The Americans want to freeze the Palestinian issue in order to finish whatever they want to finish in Iraq. They want to create headlines that they are moving forward on the Palestinian problem. The Israelis would like to impose their own view of the peace process.”

The recent Israeli air raid on an unknown target near the Turkish border has also cast doubts on hopes for renewed peace talks between the two countries.

Israel said it did not mind who was invited to the Washington conference, but it would have to be restricted “to the Palestinian track”, one official said.

Ehud Olmert, the prime minister, told the Knesset foreign affairs committee yesterday: “This is not a peace conference, but rather an international meeting aimed at offering international support to the Israeli-Palestinian peace process.”

(07-10) 15:17 PDT Chicago (AP) —

Sears Holdings Corp. surprised Wall Street Tuesday, warning its second-quarter earnings will likely fall well below expectations because of more disappointing sales at its Sears and Kmart. The news tanked Sears’ stock, which fell more than 10 percent to a 10-month low before rebounding slightly.

It would be the second earnings miss in a row for the department store chain led by Chairman Eddie Lampert, a hedge-fund guru who acquired Kmart in 2003 and Sears, Roebuck and Co. in 2005.

With Lampert at the helm, many investors have regarded Sears as a hedge fund masquerading as a department store, and have been anxiously awaiting word from Lampert about a possible expansion that could turn around the company’s fortunes. But while Sears’ profits and stock price have fared well in the past two years, revenues have continued to sink.

“While investors have sought to value Sears as something other than a retailer, its recent results demonstrate that it is not immune to the current challenging sales environment impacting retailers with big-ticket home exposure,” Goldman Sachs analyst Adrianne Shapira wrote in a research note.

For the quarter ending Aug. 4, executives at the nation’s third-largest retailer said Sears expects to earn between $160 million and $200 million, or $1.06 and $1.32 per share. That includes an 8-cent per share gain from bankruptcy-related settlements and investing activities.

Analysts polled by Thomson Financial had expected second-quarter earnings of $2.12 per share for the Hoffman Estates-based company.

“We are disappointed with our recent performance,” Chief Executive Aylwin Lewis said in a statement. “Although we believe our business has suffered from many of the same factors that have led other retailers to announce disappointing results and lowered expectations, our recent performance underscores our ongoing need to become more relevant to consumers while improving our discipline around expense management.”

Despite the company’s bad news Tuesday, some analysts seemed to continue to count on Lampert’s reputation as a shrewd money manager.

“While we believe Sears Holdings remains several years away from being a formidable competitor in the industry, we believe that management will make financial and strategic moves that should reward shareholders in the meantime,” Lehman Brothers analyst Robert Drbul wrote in a research note. “Given Mr. Lampert’s track record and the resources available to him with this company, we expect a high level of success.”

During a nine-week period that ended July 7, same-store sales at Kmart’s U.S. locations fell 3.9 percent while same-store sales fell 4 percent at Sears.

There were slight increases in women’s apparel and footwear sales at Sears stores, but that wasn’t enough to offset worse-than-expected declines felt across most other categories.

Same-store sales figures are an important retail industry metric of stores open at least one year.

“It looks like it’s going to be a pretty rough quarter, particularly with the home appliance category,” said Morningstar analyst Kim Picciola. “There are a lot of retailers vying for the same share of consumers’ wallets and it doesn’t seem as though they’re changing their competitive position in the market place. They’re continuing to lag to tough competitors like Wal-Mart and Target.”

Separately, Sears said it approved the purchase of up to $1 billion of its common shares, in addition to the $121 million worth of shares that remain available for repurchase under the company ’s current buyback program. Since late 2005, Sears has repurchased nearly 14 million shares at a total cost of $1.9 billion.

Sears shares fell $17.20, or 10 percent, to $154.21 Tuesday.

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