Steady now, but upward risk for interest rates

THE inflation outlook for the second quarter has deteriorated, fresh data shows, increasing fears of another rise in interest rates later this year.

THE inflation outlook for the second quarter has deteriorated, fresh data shows, increasing fears of another rise in interest rates later this year.

Despite widely held views that the Reserve Bank would leave the official cash rate unchanged at 7.25 per cent when it meets today, market observers say fresh inflation triggers point to more rate hikes down the line, The Australian reports.

"The RBA wants inflation to slow and growth to slow, and at the moment, the growth story looks as though it's playing out OK, but the inflation story doesn't," Sally Auld, ANZ co-head of Australian economics and interest rate research, said yesterday.

"We knew the inflation story for the June quarter was getting worse, not better, and the TD (inflation) numbers emphasise that."

ANZ has forecast another two 0.25 per cent rate hikes in August and November, a view strengthened by the release of the TD Securities-Melbourne Institute monthly inflation gauge, which showed the trimmed mean measure jumped by 0.5 per cent after a 0.6 per cent rise in April.

"So already for two out of three months we're looking at a core measure that is well over 1 per cent," Ms Auld said. "The RBA would be nervous because all the partial indicators are telling us that the inflation story has probably got worse in the second quarter."

Despite the inflation alerts, the interbank futures were pricing in close to zero chance of a rate hike today, as softer than expected retail sales data prompted the Australian dollar to lose ground.

Retail sales fell 0.2 per cent in April, contrary to expectations of a 0.2 per cent rise, sending the dollar down from US95.60c to US95.21c.

Read the full story in The Australian.