Rates to rise next week, say economists

STRUGGLING home owners are tipped to cop yet another interest rate rise next week as the highest annual core inflation numbers in 16 years force the RBA to act.

HOME owners struggling with mortgage repayments are tipped to cop yet another interest rate rise next week as the highest annual core inflation numbers in 16 years force the Reserve Bank of Australia to act.

But worries about a US recession could prevent further rate increases in 2008 as global share markets continue to wobble.

The major banks raised their retail lending rates last month, even though the RBA did not meet in January, so higher global money market borrowing costs could be passed on to customers.

With its first board meeting of 2008 scheduled for next Tuesday, 17 out of the 19 economists surveyed by AAP expected the RBA to raise interest rates by a quarter of a percentage point.

The median forecast is for the RBA to announce a cash rate of 7 per cent, the highest level since November 1996, as official rates go up for the 11th time in succession.

Speculation about another rate rise surged after the Australian Bureau of Statistics revealed last month that annual core inflation in the three months to December was at its highest level since the September quarter of 1991.

The average of the RBA's two preferred measures of underlying inflation was an annual rise of 3.6 per cent.

This was well above the central bank's 3 per cent target level.

The RBA board will meet on the morning of Tuesday February 5 and, for the first time ever, will announce its decision in the afternoon rather than waiting until the next day.

The big four banks pushed up their retail lending rates last month by between 0.1 and 0.2 percentage points without an RBA meeting, as the global credit crunch pushed up borrowing costs on the international money market.

Six of the economists surveyed forecast that official interest rates would climb to 7.25 per cent by the September quarter, while two economists predicted rates would be left on hold at 6.75 per cent.

ANZ economist Riki Polygenis predicted interest rates would climb in February and May, each time by a quarter of a percentage point, as higher private sector wages and elevated food, petrol and rent prices fuelled inflation.

"It's unambiguous: Australia has an inflation problem,'' she said.

"So we think the Reserve Bank really needs to address this quite quickly to ensure this doesn't feed inflationary expectations and wage demands.''

ICAP chief economist Matthew Johnson, who also sees rates rising in February and May, said the RBA would be more concerned about domestic inflation than a US economic slowdown.

JPMorgan chief economist Stephen Walters said rates would climb in February then remain steady as rises in August and November last year apply the brake to inflationary pressures.

Commonwealth Bank of Australia senior economist Michael Workman said the RBA would put up rates in February but then leave them on hold as the major banks raised their lending rates again.

ABN Amro chief economist Kieran Davies said while rates would rise in February, the RBA would delay further rises as it assessed the effect of a US slowdown on China, which is a major buyer of Australian commodities.

"The Reserve Bank feels that China will hold up okay but I think the market is a lot more sceptical,'' he said.

"If the US worsens or deteriorates more and Asia does feel the impact of that, I think the Reserve Bank will be prepared to keep rates on hold.''

Deutsche Bank senior economist Phil O'Donaghoe said the RBA would raise rates in February and then wait until August, after the release of June quarter inflation data, as it assessed the affect a US economic slowdown on Australia.

"We just think there's too much uncertainty. The domestic case for a tightening is strong and is very clear. If it wasn't for the global backdrop, we'd have another rate rise for the March meeting,'' he said.

Gross domestic product growth in the world's biggest economy during the December quarter came out at just 0.6 per cent on an annualised basis, the US Commerce Department said this week.

With US recessionary fears growing, AMP Capital Investors chief economist Shane Oliver said the RBA would leave rates on hold in February, and for the rest of 2008, as it assessed the potential for a US slowdown to hamper Australian economic growth.

"That slowdown in global growth will take pressure off Australian growth and inflation,'' Dr Oliver said, adding that a share market recovery next week could make the RBA more inclined to lift rates in February.