Five rate rises on the way, says Reserve Bank insider

FORMER RBA economist gives warning bank will put up rates to 5.75 per cent by end of 2011.

The chance of a rate rise by the end of the year is seen as an almost certain bet / The Australian

A RESERVE Bank insider has tipped that the bank is gearing up for a run of five interest rate rises as the commodity boom gathers steam.

The new chief economist at HSBC, Paul Bloxham, left the RBA, where he was head of its financial conditions section, a few weeks ago and yesterday distributed his first note to clients saying the bank would lift rates 25 basis points before Christmas, The Australian reported.

There would be a further four increases, bringing the official cash rate up to 5.75 per cent by the end of next year.

The RBA issued a clear warning yesterday that rates would not remain where they are, with the minutes of its last board meeting saying rates would have to rise "at some point" to keep inflation in check.

Market economists expect that point could be reached as soon as the bank's next board meeting in Sydney on October 5.

"It has been clear for a while that Australia weathered the global financial crisis better than most, but the economy's resilience continues to surprise," Mr Bloxham wrote.

Mr Bloxham, who was with the RBA's economics department for 12 years, said there was concern the economy was reaching the limits of its capacity, putting pressure on prices.

"A further challenge is that the economy starts this upturn with consumer price inflation already in the top half of the Reserve Bank's target range," he said.

Mr Bloxham said mortgage holders and businesses faced the prospect of interest rates higher than the long-term average. Another five rate rises would push standard mortgage rates up to 8.65 and small business overdrafts up to 12.1 per cent.

He predicted that a run of rate rises would sharpen the political debate about whether government spending was still too high.

A spokesman for Wayne Swan said that although the Treasurer did not comment on speculation about RBA rate moves, its cash rate was still 2.25 percentage points lower today than when Labor came to office in late 2007.

"A family with a $300,000 mortgage is still paying around $236 less a month or around $2835 less a year," he said.

The minutes of the RBA's last board meeting said the bank's central scenario was that the economy would grow at or a little above its long-term trend rate for the next several years.

Westpac chief economist Bill Evans said the RBA was likely to start pushing rates higher at its next board meeting, due in two weeks, saying the minutes "show a very significant increase in the bank's level of urgency with regard to monetary policy".

Mr Bloxham said rising utility bills, a shortage of rental housing and expectations of rising wages were likely to push up inflation.