rba says interest rates will rise further

By business editor Peter Ryan

There is more gloomy news about the threat of inflation, with a fresh warning that higher interest rates are almost inevitable.

In its quarterly statement on monetary policy released this morning, the Reserve Bank lifted its inflation forecast for the third straight quarter to as high as 3.75 per cent by the end of June.

While the central bank says the chance of inflation remaining "uncomfortably high" is considerable, it is also predicting a slowdown in economic growth.

In its 56-page assessment of the economy, the Reserve Bank says that while past rate hikes and a slowdown in global growth could temper a hot domestic economy, there is a risk that rates are not high enough to ensure a significant moderation in domestic demand.

"On the current outlook and allowing for the inevitable uncertainties in forecasting, the risk of inflation remaining uncomfortably high for some time is considerable," the RBA said.

"Absent a further shift in economic risks to the downside, therefore, monetary policy is likely to need to be tighter in the period ahead."

The RBA's forecast comes less than a week after the bank lifted its benchmark cash rate by 25 basis points to an 11-year peak of 7 per cent.

The central bank also warns that the Australian economy will have to cool significantly to restrain core inflation, leading to speculation it could tighten again as soon as its next policy meeting in March.

While warning of the inflation threat, the RBA is also lowering Australia's economic growth forecast, putting GDP growth at 3.25 per cent by the end of 2008 and 3.0 per cent in 2009.

Economists analysing the quarterly statement agree it underlines the RBA's hawkish attitude to managing the inflation threat.

"We think this signals a rate rise in March and it also certainly increases the chances they may follow through with another in May after the CPI (inflation) report," according to Jarrod Kerr of JP Morgan.

"We do have an inflation problem in Australia: food prices, petrol prices and also domestically driven pressures out of the housing market."

John Edwards, chief economist at HSBC, also sees more interest rates this year as a result of the inflation threat.

"The RBA's saying that interest rates again have to go higher unless the impact of the global slowdown is more apparent than they think likely," Mr Edwards said.

"My sense is that it's more likely to be in May than in March, with the possibility of more."

Dave R.