Professor Lawson Savery.
Professor Lawson Savery.

RBA likely to raise interest rates

THE Reserve Bank of Australia is likely to raise interest rates at its first meeting for the year next Tuesday after inflation for the three months to December came in slightly higher than expected.

The Consumer Price Index (CPI) rose by 0.5 per cent in the December quarter pushing the annual rate to 2.1pc, the Australian Bureau of Statistics reported yesterday.

Economists had been expecting 0.4pc.

Southern Cross University adjunct professor in economics Lawson Savery said the RBA would likely make a ‘pre-emptive strike’ at its next meeting.

“There is a 70 to 80 per cent chance the Reserve Bank will raise rates by 25 basis points next Tuesday,” he said.

“I don’t think they will wait until they get the next quarter CPI because it may be too late by then.”

Following three consecutive rate rises at the end of last year, the cash rate on which mortgage rates are based has risen from a 49-year low 2.37pc.

Economic forecaster Access Economics predicts rates could hit 5.5pc by the first half of 2011.

CommSec chief economist Craig James said while the relatively low inflation rate would provide the central bank with the option of staying on the sidelines, signs of an economic pick-up were likely to see it act.

“At present inflation remains a non-issue for the Reserve Bank,” he said.

“Not only is inflation not going anywhere fast, but the weaker reading on producer prices earlier in the week suggests that consumer prices should remain contained in the near term.

“But with interest rate settings still low and economic growth expected to lift over the year, we tip the Reserve Bank to lift the cash rate.

“Overall the rates decision gets down to whether the Reserve Bank lifts in February or March. If it lifts in February, then it will most likely pause in March. But if there is a rates pause in February and economic data remains strong, then the RBA will be back in March continuing its process of normalising rates.”

Although prices for petrol and imported electronic goods dragged down inflation for the quarter, it was pushed higher by fruit, domestic travel and accommodation and beer.

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