RBA keeps cash rate on hold at 4.75 per cent

THE RBA keeps interest rates on hold at its monthly board meeting today but economists expect a rise within the next few months.

THE Reserve Bank of Australia (RBA) has decided to keep the cash rate steady at 4.75 per cent at its regular monthly board meeting today.

The decision was expected, with all but one of the 13 economists surveyed last week by AAP predicting the RBA would keep rates on hold.

RBA governor Glenn Stevens today said recent economic data showed the effects of production losses due to the floods and Cyclone Yasi.

"Looking through these short-term movements, however, the recent information suggests that the marked decline in underlying inflation from the peak in 2008 has now run its course," Mr Stevens said.

"While the rising exchange rate will be helping to hold down prices for some consumer products over the coming few quarters, over the longer term inflation can be expected to increase somewhat if economic conditions evolve broadly as expected."

National Australia Bank (NAB) senior economist Spiros Papadopoulos said there was some change to the way the RBA talked about inflation in their short statement.

"Last month they said inflation over the year ahead would be consistent with the 2 to 3 per cent target, they are now saying inflation would be close to target over the year ahead," he said.

"So that's suggesting they are now seeing inflation rising above 3 per cent over the next 12 months.

"It confirms to us that if we see high inflation figures coming through, we're in line for another rate increase later this year."

Mr Papadopoulos said NAB is still expecting the RBA to next raise the cash rate in August.

ICAP senior economist Adam Carr said the central bank hadn't come to grips with the recent economic data, which he believed suggested inflation was picking up.

"It's as if they hadn't seen the last CPI (consumer price index) numbers and they haven't quite processed the recent data flow," Mr Carr said.

He expected the central bank to raise the cash rate in June, after digesting recent data.

He said the statement accompanying the RBA's decision revealed the bank had been forced to change its mind on the domestic economy.

"The labour market has been strong - they're playing that down. CPI has spiked up - they're playing that down," Mr Carr said.

"This is reflecting an organisation which has been caught unawares. They've misread the economy and now they're just processing that."

HSBC chief economist Paul Bloxham said that it was clear that the RBA was less comfortable with the inflationary outlook than they were last month.

"They are noting that inflation has troughed and you get a sense from the statement that the tightening bias that they have is stronger now than it was last month," Mr Bloxham said.

He said it was also clear that they were in no rush to raise the cash rate, partly due to the high exchange rate.

"To some degree, it seems from the statement, that they're not quite sure how much effect the exchange rate was likely to have.

"That partly extends from the fact that the exchange rate movement is so recent."

Mr Bloxham expected the central bank to raise the cash rate to 5 per cent either in July or August.