The Reserve Bank will lift rates at its August 3 meeting if inflation shows signs of getting out of hand when the consumer price inflation figures are published on July 28.

That, however, is not saying that the bank will lift rates.

The minutes of the July 6 board meeting, when the bank sat on rates for a second successive month, state clearly that the inflation outlook, followed by events offshore, are the present drivers to monetary policy.

Offshore the most immediate hurdle as the results of the stress tests of the financial health of 91 leading European banks. The results are out Friday night, our time. Most are expected to pass, which will lift confidence.

But Australian inflation is the key for the RBA, and it knows there will be a high reading for the June quarter.

“CPI inflation was, however, expected to rise to a little above 3%, partly due to the effects of higher taxes on tobacco. Measures of inflation expectations had eased a little over the past month,” the minutes said.

They finished with this:

Members noted that the coming month would see important announcements about the health of the European banking sector, which had the potential to have a significant impact on financial markets and global confidence. There would also be an updated reading on domestic prices.

This was expected to show further moderation in the year-ended underlying rate, although underlying inflation was likely to remain in the top half of the target range over the period ahead. Headline inflation was expected to rise, owing to the effects of some tax increases, with the year-ended increase in the CPI rising above 3%.

The important question for the board at its next meeting would be whether the new information materially changed the medium-term outlook for inflation.

Pending this information, the board judged it appropriate to hold the cash rate unchanged.

The CPI in for the March quarter showed a rise of 0.9%, for an annual headline rate of 2.9%.

The RBA. underlying measures, the trimmed mean and weighted median, showed rises at an annual rate of 3.0% and 3.1% respectively.

The bank has shown in the past that it is prepared to cop a higher than target rate of inflation on a headline basis for a while, and on its preferred measures for a bit less, not it doesn’t always react instinctively and push up rates when the lurch above the 3% top of the target level.

Of course, a rate rise would be unsettling for Prime Minister Gillard and her Labor Party, and sweet justice for the Liberals after bank shoved rates up in the 2007 campaign.

And if rates rise, Julia can blame her state Labor mates, especially in NSW, Victoria and Queensland where power, transport, water and sewerage charges are rising faster than inflation and have been for much of the past year.

And if rates rise she can also also thank her mates in the public sector unions because wage rises in the the government area are going up at 4% plus a year, compared with an average of about 2.5% for the private sector (although more in the booming resource states and industries).