Inflation rise could force RBA's hand

Inflation is not slowing as quickly as first anticipated, which could force the RBA to lift interest rates again when it meets next week.

According to the Australian Bureau of Statistics, underlying inflation, though easing in the first three months of the year, still remains above the RBA’s target band of 2 to 3 per cent.

Rising fuel prices, medicine and electricity costs forced the headline consumer price index up by 0.9 per cent in March – 2.9 per cent higher than the same time last year.

If the RBA does decide to raise rates next week, it will be the third time the bank has lifted the official cash rate this year.

Bankwest’s chief economist Alan Langford said the latest CPI results teamed with the ongoing ramifications of Greece’s sovereign debt travails, complicate an already conflicting set of signals the RBA must interpret before Tuesday.

“If doubts about Greece’s capacity to finance its deficit causes the RBA to hold fire next week, it will be only a brief reprieve for mortgage holders,” Mr Langford said.

“Unless of course problems in the euro economies spill across the Atlantic and escalate into a new financial crisis, in which case concerns about inflation will be put to one side, even by the RBA.

“But as recently as this month’s RBA Board meeting, which raised the cash rate to 4.25 per cent, the central bank was downplaying the risk of contagion from Greece. So unless a steep pull-back in share prices triggers significant erosion in household wealth, the RBA is likely to continue raising the cash rate towards 5 per cent by the end of this year, and probably beyond that level next year, as commodity prices recover quickly from the global financial crisis.”

 

 

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