Reserve Bank set to hold back on interest rate rise

A RATE hike is unlikely until well into 2011 after data showed underlying inflation had slowed to its lowest level in a decade.

Interest rates

THE Reserve Bank of Australia is expected to delay its next interest rate rise until well into 2011 after the latest economic data showed underlying inflation had slowed to its lowest level in a decade, despite soaring petrol and food prices.

The central bank is almost universally expected to leave the official cash rate at 4.75 per cent at its monthly board meeting today - and for some time into the future - while it waits to see the impact of Japan's earthquake on Australia's key commodity exports.

Economists believe the lower-than-expected increase in core inflation has given the RBA breathing space to sit on the sidelines while it assesses whether the disaster in Australia's second-biggest trading partner will hurt the local economy.

But they warn that the bank's next rate move is still likely to be upwards as continued strength in the employment market and an expected turnaround in consumer spending push up prices for goods and services later this year.

The TD Securities-Melbourne Institute monthly inflation gauge showed yesterday that core inflation, which strips out volatile items such as food and petrol, rose a modest 0.3 per cent in March or 2.4 per cent for the year, thanks in part to a modest fall in prices for household goods and rents.

Headline inflation, on the other hand, jumped 0.6 per cent in March or 3.8 per cent for the year following a steep rise in prices for fruit and vegetables, petrol, tobacco and alcohol.

TD Securities economist Annette Beacher said the inflation gauge continued to show "contrasting trends", with core inflation remaining well within the RBA's target range of 2 to 3 per cent and headline inflation climbing towards 4 per cent.

The investment bank now expects the RBA to raise rates by 0.5 per cent this year - down from its previous forecast of 1 per cent - to take account of the lower-than-expected growth in core consumer prices.

HSBC economist Paul Bloxham said the strong Australian dollar - which passed through $US1.04 yesterday for the first time since it floated in 1983 - took pressure off the RBA to lift rates.

"If the exchange rate persists at a high level or appreciates further, it puts downward pressure on inflation," he said.

"In this way the exchange rate will do some of the RBA's work for it."

Long term, economists still predict rate rises based on employer demand.

The ANZ job advertisements index increased 1.3 per cent to an average of 195.913 ads.

CommSec economist Savanth Sebastian said the labour market would be a "hot issue" in coming months. "As long as the supply of labour remains adequate, the Reserve Bank can remain on the interest rate sidelines," he said.