It's uphill from here on rates

AUSTRALIA is still on the road to higher rates despite the RBA sticking to the sidelines at its first meeting of the year.

Glenn Stevens

AUSTRALIA is still on the road to higher interest rates despite the Reserve Bank sticking to the sidelines at its first meeting of the year.

But although RBA watchers agree the next move is up, they are divided over whether rates will head north this half or next.

Announcing yesterday's widely expected interest rate reprieve, with the official cash rate kept on hold at 4.75 per cent, RBA governor Glenn Stevens said monetary policy was "appropriate in view of the general macroeconomic outlook".

Delivering his first public comments for 2011 -- and responding to the Queensland flood disaster for the first time -- Mr Stevens stressed that the RBA's focus in setting interest rates would remain on medium-term inflation. The bank would "look through" short-term effects on activity and prices because of the floods.

The RBA expected that post-crisis reconstruction efforts over the next year or two would "add modestly to aggregate demand", but this was "unlikely to have a major impact on the medium-term outlook for inflation".

Responding to Mr Stevens' comments, Commsec chief economist Craig James said: "In short, the RBA says that the floods won't impact interest rate settings."

But HSBC's Paul Bloxham said the RBA had been "very careful" to say the rebuild would not have a "major" effect.

"They are cunning wordsmiths, all of them," he wrote in a research note.

"In our view, this suggests that the RBA is certainly entertaining the idea that the floods could, indeed, boost inflation in the medium-term. And thus may require a monetary policy response."

Mr Bloxham, who joined HSBC last year after 12 years at the RBA, described the tone of the central bank chief's comments as "on the hawkish side".

"We continue to expect the next rate rise to be in May or June."

ANZ head of macroeconomics Katie Dean predicted that rates would be on hold until July.

She said the RBA was "very comfortable" with interest rate settings.

"They've reaffirmed their previous expectation that inflation will remain within the 2 to 3 per cent target band for the next 12 months and I think what that means is that we're probably going to see interest rates on hold for some time now, at least for the first half of this year."