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Yet another rate rise is on the cards

Posted by Tamara McDowell on May 3, 2010

With Australia’s economic indicators continuing to point to strong growth, the Reserve Bank may have little choice but to increase the cash rate by another 25 basis points when it meets tomorrow.

Producer and consumer prices, which indicate inflation, both came in above market expectations in the first quarter of the year. Core prices increased by 3.1% in annual terms – placing them outside the RBA’s 2-3% range.

“While recent RBA commentary has suggested a more gradual monetary adjustment process from this point, we think the risk to inflation is too great and that the RBA will need to raise the cash rate for a third-consecutive month,” ANZ research analyst Andrew Dowman said.

AMP Capital’s chief economist Shane Oliver agrees, saying that the combination of strong inflationary pressure and continued economic growth will put pressure on the central bank to tighten monetary policy.

“The pick-up in the quarterly pace of underlying inflation in the March quarter coming at a time when economic growth has returned to trend, national income is likely to receive a strong boost from higher iron ore and coal prices and house prices are booming is likely to drive the RBA to continue the process of raising interest rates back to longer term average levels,” Oliver said. “As a result we expect another 0.25% hike in the cash rate taking it to 4.5%.”

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