Inflation backs case for RBA to lift interest rates by 25 basis points

CONSUMER price inflation picked up pace last quarter, bolstering expectations that the Reserve Bank of Australia will further raise interest rates at its policy meeting next Tuesday.

Australia's inflation was "just low enough to remove the threat of a 50-basis point hike" next week at the RBA's November meeting, Macquarie Group senior economist Brian Redican said.

The consumer price index rose 1 per cent in the September quarter following a 0.5 per cent rise in the previous quarter, the Australian Bureau of Statistics said today. Economists had expected the CPI to rise 0.9 per cent.

The increase in the CPI from a year earlier moderated to a new ten-year low of 1.3 per cent in the third quarter from 1.5 per cent in the second quarter.

An average of the RBA's two measures of core inflation was 0.8 per cent in the September quarter, slowing the annual pace to 3.5 per cent from 3.9 per cent in the previous quarter. Core inflation is still high enough to suggest it will remain troubling for the RBA into the future.

The Australia dollar rallied, then fell, after the data, as debt futures markets locked in a 25-basis-point hike next month. By early afternoon, the Australian dollar was quoted at US91.39 cents, down from US91.80c just before the data.

The central bank raised its cash rate target by one quarter of a percentage point at the start of October, making it the first central bank in the Group of 20 to start unwinding monetary stimulus.

RBA covernor Glenn Stevens has warned the emergency settings for monetary policy must be removed as Australia has experienced only a modest downturn in the face of the global financial crisis, and is now in recovery mode.

The RBA expects economic growth will return to trend rates of growth in 2010, which economists estimate is around 3 per cent to 3.25 per cent. The RBA indicated last week it plans to revise higher its forecast for inflation in a report in September.

With the economy recovering and plenty of economic stimulus still in the economy, pressure is set to remain on the central bank to normalise interest rates quickly.

Increases in electricity, water and sewerage charges, petrol prices, deposit and loan facility costs and house purchases were offset by lower prices for fruit and vegetables, financial services, electrical goods and drugs, the bureau said.

Economists said many of the price increases were due to structural problems in the economy or due to government policy changes, which can't be stemmed by interest rate changes.

"The Reserve Bank doesn't have total control over inflation," said Craig James, chief equities economist at Commonwealth Securities.

"The RBA could jack up rates markedly but it still wouldn't affect electricity or water rates or even petrol prices.”