Inflation increase puts pressure on rates

AUSTRALIA's inflation rate has soared to a 17-year high and exceeded market forecasts putting upward pressure on interest rates. The headline CPI rose by 1.3 per cent in the March quarter, for an annual rate of 4.2 per cent. The median market forecast for the period was for a rise of 1.1 per cent in the March quarter and an annual growth of 4.0 per cent.

The RBA's preferred measures of underlying inflation which was highlighted in the CPI report showed an average annual rate of 4.25 per cent in the year to March compared to 3.6 per cent previously. The last time underlying inflation was at this high level was 1991.

Federal Treasurer Wayne Swan said the inflation figures were not ideal in the current climate.

"I think these inflation figures are a stark reminder of the price pressures hitting Australian families and I think they demonstrate the pain that people are feeling around the kitchen table." Mr Swan said.

He went onto add that the figures are "unacceptably high, and they underscore the need for a responsible budget that keeps spending under control, and that tackles inflation and interest rates challenges.''

The RBA had forecast inflation to hit 4 per cent in the March quarter. An increase in this forecast could pressure the RBA when in two weeks time they meet to decide the next interest rate movement.

ICAP senior economist Matthew Johnson highlighted that the central bank would be "very concerned by the acceleration the core inflation rate" and that "it's obviously far too strong.''

"I think it's obviously a fifty-fifty question coming into the May meeting, but I think the slowing global and domestic picture will keep them on the sidelines but it's no done deal ''Mr Johnson said.

The central bank board meets to discuss monetary policy on Tuesday, May 6. Mr Johnson said the bank would have "no tolerance for any continuation of this sort of inflation trend."

ANZ head of research Warren Hogan said the data meant there was a "risk" of another rate rise after today's numbers. He went onto add if the RBA does decide to raise interest rates, it would more likely be in August after the second quarter CPI figures are released in late July.
"It will probably more likely happen in August if they were going to move, rather than in May, because they are seeing the economy slow but if the economy does not slow and the next CPI, is high, which we suspect it will be unfortunately, they will probably more likely to move in August.''

Standard variable home loan rates were 14.5 per cent in April 1991. Standard variable rates are now 9.35 per cent.

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Published on April 4-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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