Rates on hold - for now

THE Reserve Bank of Australia is expected to leave the door open to a further rate rise by midyear as it wages war on inflation, analysts say.

THE Reserve Bank of Australia is expected to leave the door open to a further rate rise by midyear as it wages war on inflation, analysts say.

The central bank has pushed its cash rate target to 7.25 per cent – the highest level since 1996 – to prevent runaway price rises from damaging the economy.

Economists expect the RBA, having lifted rates in February and March, will leave the cash rate alone today but will issue a statement reaffirming its leaning toward further rate rises.

The RBA has warned first-quarter Consumer Price Index data, due on April 23, is likely to show an annual inflation reading of 4 per cent, against the 2-3 per cent it targets.

Inflation out of control

Yesterday's TD Securities-Melbourne Institute inflation gauge for March showed a 3.8 per cent annual rise in the trimmed mean measure, with chief culprits being dearer petrol, fruit and vegetables, rent and financial services costs.

TD Securities senior strategist Joshua Williamson said the RBA would be worried over strong inflation showing "few, if any, signs of topping out".

Financial futures markets show traders have started betting rates have peaked and the RBA this year could cut rates.

But economists say the cash rate will remain at 7.25 per cent at least until the middle of 2009 and there is an even chance of another rate rise to 7.50 per cent by June, given the RBA has said it wants to see a significant slowing in domestic demand to tame inflation.

Commonwealth Bank of Australia chief economist Michael Blythe said there is still the risk of an RBA rate rise to 7.5 per cent in May.

JP Morgan Australia chief economist Stephen Walters said the RBA would leave the cash rate unchanged this week as instability in global financial markets argued for caution.

He expected the RBA would leave the way open to a quarter-point rise in May, triggered by a likely strong reading in first-quarter CPI.

But UBS says the RBA's comments this week could signal a looming neutral stance, given data has shown some slowing in demand and the effects of the latest rate hikes were yet to be reflected.

Credit growth slows

The RBA yesterday released private sector credit growth data for February, showing consumers and businesses becoming more cautious.

Overall credit growth in February rose by 0.7 per cent from January, below market expectations of a 1.1 per cent rise. Outstanding credit for personal lending fell by 0.1 per cent, while housing credit rose 0.9 per cent, the same as in January.

The overall annual rise in private sector outstanding credit was 15.5 per cent in February, easing from 16.2 per cent.

The pace of growth has been above 15 per cent since June.

JP Morgan analyst Helen Kevans said the RBA would be anxious that credit had continued to expand rapidly.

"Firm credit demand, coupled with a poor inflation outlook, means that, in our view, further tightening is warranted," Ms Kevans said. "We expect another hike in May."

CommSec chief equities economist Craig James said another rise would be unnecessary if the latest credit figures were backed by evidence of weaker spending.

Retail sales for February are due for release on Friday