Inflation boosts rate-rise chances

A marginal fall in inflation last quarter is not enough to reduce the chances of an interest rate rise on May 7 when the reserve Bank meets again for its monthly look at official rate settings. The figures serve to confirm the view that rates are likely to rise by 0.25 percentage points. The Consumer Price Index rose 0.9 per cent in the three months to March, down from 3.1 per cent the previous quarter, sneaking the inflation measure back inside the RBA’s target range of 2 to 3 percent. The picture on ongoing inflation is more clouded but appears to be still at 3 per cent or above, although down from 3.6 per cent last quarter. The RBA has been quite relaxed about the inflation outlook believing the CPI will fall to 2.5 per cent by the second half of the year. However, the danger is that the robust condition of the economy may see greater inflationary pressures offset the expected price falls the RBA is banking on. Falls in the price of vegetables, clothing, footwear and household appliances helped ease the annual CPI rate last quarter but higher oil prices and telco costs are just two areas where higher prices can be expected this quarter. The higher Australian dollar and moderate wage growth are, however, working in favour of lower inflation. Given the Reserve Bank’s relaxed stance there is little chance of a rate increase of more than 0.25 percentage points in May. This would put official rates back to 4.5 per cent, still quite expansionary levels, and add $25 a month to a 25-year, $150,000 loan. Retail trade and building approval figures out on May 2 and 3 will also be important indicators in the interest rate outlook. They have been surprisingly resilient in recent months and continued strong figures will mean rates on the rise sooner rather than later.