Interest rates seen steady, for now

INTEREST rates are tipped to remain on hold this week thanks to signs the economy is cooling, according to analysts.

INTEREST rates are tipped to remain on hold this week thanks to signs the economy is cooling, according to analysts.

But forecasters are divided on whether rates might need to rise again by the year's end to combat any commodities-fueled resurgence in inflation.

The Reserve Bank of Australia's official cash rate has been hiked to a 12-year high of 7.25 per cent amid attempts to rein in the nation's economy.

"It will appear in the next, say, four months that the economy is slowing down," ABN Amro Morgans chief economist Michael Knox said yesterday. "It will appear we've got on top of the inflationary problem."

But by the year's end, he expected renewed pressure due to the positive terms of trade, which is fueled by higher prices for coal and iron ore.

"What will be discovered is that the result of the monetary tightening so far and the modest tightening in the Budget wasn't enough to slow the economy in terms of (increased) terms of trade," he said.

Another factor he cited at this year's end, and more so next year, might be an opening of credit markets. Tight credit markets helped crimp borrowing by businesses recently.

The RBA board - including former Woolworths' boss Roger Corbett and Telstra chairman Don McGauchie - has its monthly meeting tomorrow.

No reason for rate lift

CommSec chief economist Craig James said the RBA had "no reason to lift rates" at this meeting.

"High petrol prices are acting like a tax or rate hike on the economy, causing people to cut back spending and retailers to undertake more discounting," he said.

But he warned the RBA might lift rates another 0.25 of a per cent - possibly in August following the release of quarterly inflation figures.

Of 19 analysts polled by AAP news service, 12 predicted rates would remain flat this year, five an increase and two a fall.

Wages risk

AMP Capital Investors chief economist Shane Oliver said: "We see interest rates remaining on hold on the grounds that while inflation is uncomfortably high, financial conditions have tightened considerably and the slowdown in demand now underway should ensure inflation returns to target in 2010."

But he said the RBA would probably be watching for a re-acceleration in spending or pick-ups in wages.

Mr Knox was predicting headline inflation could hit 4.5 per cent.

He said a driving factor was rising wages for services-providers.

Dr Oliver said "wages data" had remained benign recently.