RBA hints at interest rates rising faster

RBA makes clear a rate rise is expected in the second half of 2011 after lifting its inflation forecasts for the next two years, economists say.

Reserve Bank

THE central bank has made it clear a rate rise is expected in the second half of 2011 after lifting its inflation forecasts for the next two years, economists say.

The Reserve Bank of Australia (RBA) expects underlying inflation to hit three per cent by December - one year earlier than it forecast in February.

In its quarterly Statement on Monetary Policy, published on Friday, the bank cited further tightening of the labour market and the likelihood of a significant pick-up in the mining sector as inflationary risks.

The RBA kept its cash rate at 4.75 per cent at its May board meeting, after last raising it in November 2010.

St George Bank chief economist Besa Deda says she's now expects the next rate hike to be in August.

"The underlying inflation forecasts have risen and they sent a pretty strong message there will be more tightening, so we think two rate hikes in the second half of this year are on the table," Ms Deda said.

She said the language in the RBA's statement was more hawkish than the short statement released after Tuesday's rate decision because it clearly warned that the cash rate needed to be raised.

JP Morgan chief economist Stephen Walters also said the RBA was clear in its message.

"It's pretty punchy, in the sense that they're forecasting growth above trend, they're forecasting core inflation above target and they're forecasting a jobless rate well below full employment, so there's little that's ambiguous about that," Mr Walters said.

"It's all pretty clear that seemingly the anxiety about the inflation outlook has got a bit worse and I think they're trying to send the message that interest rates are going up here."

The RBA made also it clear future rate rises were on the cards, with the statement that higher rates were "likely to be required at some point," he said.

"That's pretty straightforward and it's supported by all the forecast changes that we've seen today as well."
JP Morgan predicts the next rate rise will be in August.

"We don't think there's a mad rush here," Mr Walters said.

"We thought they'd raise their inflation forecast, but the fact that they're forecasting above target core inflation in two years time is pretty clear."

Citigroup economist Paul Brennan also said the statement was "very hawkish".

"It ramps up their rhetoric and goes beyond the governor's statement earlier in the week," Mr Brennan said.

"In particular they make crystal clear their guidance that interest rates are going to have to rise, whereas it's quite in contrast to what the market's been pricing.

"So clearly they've got an eye on jawboning those market expectations."

He said the RBA did not seem to be worried about the current slowdown in the economy.

"They're thinking that it's going to quickly give way to an re-acceleration to above trend growth, which will persist for a couple of years ... obviously they're very bullish on the mining and energy capex (capital expenditure) through quickly."

ICAP senior economist Adam Carr says there's no mistaking the RBA's message that another rate rise isn't too far away.

"They've certainly made an upgrade to their inflation forecasts, which wasn't unexpected," he said.

"They expect core inflation to be 3.0 by year end and basically to stay there for a couple of years.

"Under any reasonable criteria, it would suggest that we're seeing a near-term rate hike."

Mr Carr is forecasting the next cash rate rise to be in June and expects a total of three rate hikes in 2011.

"They've got strong growth, strong inflation. Global growth is strong. I don't know what the dovish case is."