Economists tip a rate rise as RBA meets

THE central bank will almost certainly raise the official interest rate this week as it tries to keep inflationary pressures in check.

THE central bank will almost certainly raise the official interest rate this week as it tries to keep inflationary pressures in check and move towards a more normal policy setting in 2010.

Sixteen economists surveyed believe the Reserve Bank board will vote to lift the cash interest rate by 25 basis points to 4 per cent at its meeting tomorrow.

It will be the fourth hike in as many meetings. The RBA board did not meet in January.

Debt markets are pointing to a 73 per cent chance of a February 2 rate rise, up from 61 per cent last week.

The prediction comes after the release in January of higher than expected quarterly inflation figures and strong employment data.

"We're starting this cycle with a pretty high level of core inflation and the policy may have to be restrictive," 4Cast head of research Ray Attrill said.

Economists say the move won't be the end of rate hikes by the RBA, which began lifting the cash rate in October 2009 after pushing it down to a 49-year low of 3 per cent to help the national economy deal with the global downturn.

RBA deputy governor Ric Battellino surprised financial markets in December when he said interest rates were moving back to a "normal range", following rises in commercial bank deposit, housing and business lending rates.

This prompted economists to tip a normal, or neutral rate -- the interest rate consistent with sustainable economic growth -- of about 4.5 per cent. But some economists also think the RBA might pause after February for a few months before considering further rises.

ANZ economist Alex Joiner expects the RBA to pause for about three months. "I think they're going to be fairly cautious on the way they raise rates," he said.

"The Reserve Bank doesn't want to impinge on the recovery with successive, aggressive rate hikes."

Mr Attrill predicts a "spluttery, stop-start" path for the cash rate.

"The indications the RBA was giving towards the end of last year were that they think rates were already fairly close to neutral," he said. "If there are indications the economy is not running quite as hot as some of the pre-Christmas data would suggest, then there is a chance they will pause there."