To raise rates or not?

Economists believe a rate rise next week is a near certainty after a rise in the cost of living in the final three months of last year. Australia's headline consumer price index (CPI) rose 0.5 per cent in the December quarter, for an annual rate of 2.1 per cent, the Australian Bureau of Statistics (ABS) said on Wednesday.Fruit, holidays, beer and house prices all rose, but were offset by lower petrol prices (lower petrol prices?gee folks, I must have missed that one!). Electrical goods and pharmaceutical prices also fell. The trimmed mean CPI rose 0.6 per cent in the December quarter, for an annual growth rate of 3.2 per cent.The weighted median CPI rose 0.7 per cent in the December quarter, with an annual rise 3.6 per cent.The median market forecast was for the headline CPI to have risen by 0.4 per cent in the December quarter, for an annual pace of 2.0 per cent.Economists had expected the average of the two underlying measures of inflation to rise by 0.6 per cent in the December quarter, for an annual pace of 3.35 per cent.The ABS calculates the trimmed mean and weighted median measures on behalf of the Reserve Bank of Australia (RBA), which uses them to gauge the underlying trend in inflation.
Unlike the headline CPI, the RBA's underlying measures are subject to revision due to the seasonal adjustment of some of their components.The RBA is still likely to raise official interest rates next week, economists predicted. (yeah, so what's new?)Commsec senior economist Craig James said the headline result was above than market expectations, albeit not substantially higher.The good news was that the annual growth rate of CPI inflation was within the RBA's two to three per cent target band, he said."If there is any risk, it is that it could end up bottoming out right at the top end of the band or slightly above, so I think on balance the Reserve Bank will increase interest rates in February," he said.But a rise in the cash interest rate after the bank's board meeting, to be held next Tuesday, was by no means certain."The Reserve Bank will be using a lot of strategy in terms of looking at interest rates over the next few months," he said.
"It may decide to wait in February and look at a bit more evidence on the economy." (yes! please do that. allow people a breathing space, recovery is slow and uncertain. don't blow it for Australia's economy, RB)Interest rates in Australia remain well below long term averages.
Mr James said the high point for the cash rate, currently at 3.75 per cent, in 2010 would probably be somewhere between 4.75 and 5.00 per cent."I don't think that's under threat, but clearly there's a lot of things the Reserve Bank has got to juggle in its own mind - things like the special stimulus being applied from tax breaks, the [federal] government's assistance payments and what the cessation of those measures is likely to do to the economy," he said. (yes! they need to look at how the tax breaks have eased the situation and how an increase in rates will make things so much more difficult)"I don't think the (latest result) is going to stop the Reserve Bank lifting rates up to more normal levels."He said inflation at this stage looked "reasonably controlled," but could creep higher if the economy picked up steam amid strong employment growth.The trajectory of rate increases throughout the year was still "an open question," he said.ICAP senior economist Adam Carr said he could not see how the RBA could pause on raising interest rates at its next board meeting on February 2."We are not looking at a subdued inflation backdrop," he said."We're looking at a situation where although core inflation is moderating, it's not really going down fast at all."It's grinding lower and going into what could be a very strong recovery."It's very dangerous to have core inflation well and truly above the target, or even at the top end of the target, so for a forward-looking central bank with an existing stimulatory policy setting I think they will be compelled to hike by 25 basis points."Mr Carr said the prospect of an interest rate pause by the central bank in March was "questionable"."There's no automatic resting point for the RBA."I think that's a misunderstanding by people in the market."He said the underlying inflation figure was the main driver for the RBA to lift interest rates next monthMr Carr predicted inflation would not fall much below three per cent by the end of the year."I think we will be at three per cent by the end of the year, notwithstanding RBA rate hikes."He forecast the RBA would lift interest rates by 100 basis points by the end of 2010. staff