Jobs key to interest rates puzzle

MORTGAGE holders are expected to be spared more interest rate pain when the RBA meets tomorrow but rates are on the way up soon.

HOME loan borrowers are expected to be spared further interest rate pain tomorrow.

However, it's not all good news as "critical" job numbers out this week could help force the Reserve Bank's hand next month.

After Australia's economy suffered the worst slide in 20 years last quarter, the RBA board is widely expected to keep the official cash rate on hold for a seventh consecutive month tomorrow.

But pundits say mortgagees should be under no illusions: with inflation risks mounting, rates are heading higher, and soon.

HSBC chief economist Paul Bloxham, who is forecasting a rise next month or in August, said official job numbers to be released on Thursday were "a critical piece of the puzzle".

With the nation's unemployment rate already below 5 per cent - a level deemed consistent with full employment - Mr Bloxham said further labour market tightening would help move the RBA off the sidelines.

AMP Capital Investors chief economist Shane Oliver said a strong jobs report would bolster the odds of a July rate rise, but he doubted that it would be strong enough to justify a move on its own.

"If other indicators released over the next month all came in on the strong side and some of these uncertainties about the global recovery suddenly faded then a July move would be certainly on the cards," Dr Oliver said.

Bleak job data from the United States sent Wall St tumbling further on Friday night, down 0.8 per cent, and the offshore lead is expected to weigh down the Australian market this morning.

Dr Oliver said an interest rate rise would "only add to the doom and gloom" of the Australian share market, which suffered its biggest one-day fall in almost a year last week fuelled by fears the US recovery is stalling.

Data released last week revealed Australia's economic output shrank 1.2 per cent in the three months to March, the biggest quarterly fall since the nation's last recession in 1991.

But Mr Bloxham said aside from a lack of coal exports, with production hit by the Queensland floods, "the rest of the accounts actually looked fairly strong".

If the RBA keeps the cash rate on hold at 4.75 per cent tomorrow, all eyes will be on a statement released by governor Glenn Stevens for clues as to the timing of the bank's next move.

UBS interest rate strategist Matthew Johnson said the RBA needed to explain why rates were heading higher. "The RBA needs to bring people along for the ride and explain exactly why they're doing what they're doing," he said.

The RBA was faced with "a PR problem", "because it's so hard to say to people: 'We're raising rates ... and, yes, we know things have been pretty crappy, but trust me, things are going to get better for you, in fact they're going to get too good'."