From Yahoo:Rising inflation makes rate hike a near...

From Yahoo:

Rising inflation makes rate hike a near certainty

Wednesday October 28, 2009, 12:45 pm




A higher than expected inflation figure has most economists confident that interest rates will rise next Tuesday.

Headline inflation came in at 1 per cent for the three months to September, which was above the median economist forecast of a 0.8 per cent increase.

The quarterly rise meant an annual headline inflation rate of 1.3 per cent, but the two less volatile measures that are preferred by the Reserve Bank were at 3.2 per cent and 3.8 per cent respectively.

These 'trimmed mean' and 'weighted median' measures of core inflation exclude items with high price fluctuations, such as petrol, and are remaining stubbornly above the Reserve Bank's target of 2-3 per cent core inflation.

Most economists say the figures make a 25 basis point official interest rate rise next Tuesday a sure bet, but they are unlikely to be high enough to prompt the RBA to raise by 50 basis on Melbourne Cup Day.

"It justifies a tightening in policy but there wasn't the acceleration in inflation that would have prompted more aggressive action from the Reserve Bank," Macquarie's senior economist Brian Redican told Reuters.

"That means the RBA can stick to its original game plan and likely lift rates by 25 basis points next week."

Stephen Walters, the chief economist at JP Morgan, agrees that the Reserve Bank is likely to confine itself to 0.25 percentage point increases.

"A little on the high side, both the headline and trimmed mean, and that basically locks in a rate hike for next week, but I think that means it's going to be a quarter point," he told Reuters.

"This number's just not bad enough to trigger anything other than a quarter point rate rise."

However, while rates may not surge higher next Tuesday, Stephen Walters expects the RBA to keep raising rates steadily this and next.

"We're saying [a rate rise] again in December and in February as well, simply because they need to get out that 100 basis points of what I call emergency accommodation, as reasonably quickly as they can."

The Reserve Bank interest rate decision will be announced at 2:30pm (AEDT) next Tuesday.

Electricity leads the rise
The inflation figures present doubly bad news for households: not only do they face the prospect of interest rate rises, but the main increase in prices came from electricity.

Power prices surged 11.4 per cent during the quarter, although the September quarter tends to be when the whole year's increase in utility prices are passed on, meaning further increases in this segment over the next three quarters are unlikely.

Water and sewerage also surged 14.1 per cent over the three months to September 30 as annual price increases were introduced on July 1.

Automotive fuels climbed 4 per cent as global oil prices bounced back.

Independent rate rises by the banking sector pushed deposit and loan prices (largely interest costs) higher, while house price rises also contributed to inflation with a 1.1 per cent increase in the quarter.

However, not everything became more expensive during the September quarter.

Prices for fruit and vegetables fell 5.4 and 5.6 per cent respectively, while pharmaceuticals went down 4.4 per cent, and technology continued to become cheaper with a 2.2 per cent fall.


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