Reserve Bank warns on interest rates

DESPITE keeping mortgage rates on hold yesterday, the Reserve Bank gave a stark warning that it will lift them again soon if wages or prices race...

RBA warns on interest rates

DESPITE keeping mortgage rates on hold yesterday, the Reserve Bank gave a stark warning that it will lift them again soon if wages or prices race away.

The RBA left the cash rate steady at 7.25 per cent for a third straight month.

The central bank's warning came as Prime Minister Kevin Rudd warned of a long fight against inflation.

Mr Rudd cautiously welcomed the RBA decision.  "This will be a 15-round fight. It's going to go for a long time," he told Parliament.  "There's no knockout blow when it comes to inflation.

"We are resolved with absolute determination on the part of this Government to fight the fight against inflation."

Economists also urged the RBA to hold its nerve.

In a statement accompanying the decision, the RBA board said: "Should demand not slow as expected, or should expectations of high ongoing inflation begin to affect wage and price setting, (the) outlook would need to be reviewed."

An outbreak of wage pressure and price rises may yet spark another interest rate rise, according to economists.

Rate rise expected this year

Financial markets say there is an almost 70 per cent chance of rates rising to 7.5 per cent by the end of the year.

CommSec chief equities economist Craig James said: "The economy has clearly slowed and rate hikes are clearly working."

But Mr James added: "The world has never seen industrialisation of an economy the size of China, providing an ongoing boost to incomes and wealth levels of all Australians."

Since 2002, the RBA has raised rates 12 times, from a low of 4.25 per cent, to try to curb household spending levels.

Last week, the ANZ forecast two interest rate rises this year but some economists said this was an overly bullish forecast.

NAB chief economist Alan Oster said the RBA should have faith in its convictions and stare through the next couple of months of conflicting economic data.

The slump in retail and car sales combined with a drop in consumer and business confidence are clear signs the economy is slowing.

Inflation above target

But inflation is forecast to stay above 4 per cent for the rest of the year -- well outside the RBA's target zone of 2-3 per cent growth.

Data released yesterday also showed that Australia sucked in almost $20 billion more in imports than it exported last quarter.

But economists say it could have been much worse.

The record $19.492 billion current account deficit for the March quarter was lower than expected, suggesting the economy was beginning to contract in the face of higher interest rates.

Australia now owes the world $616 billion.