CPI promises big clue on rates

Nearly all indicators point to an interest rate rise sooner rather than later and the key March quarter inflation figure out next week could well be the last piece of the jigsaw.

December-quarter inflation jumped above the Reserve Bank’s target limit of 3 per cent with the underlying rate an uncomfortable 3.6 per cent. While one-off factors behind the spike are expected to have eased, the ongoing strength of the economy means a fall back inside the target range is by no means assured.

If it does stay high, the Reserve Bank’s relaxed stance on price pressures will be tested and a rate rise almost assured next month. The housing market has shown signs of easing but at current effervescent levels it appears higher rates are needed soon to ensure a return to more appropriate levels.

At this stage, a 0.25 percentage point rise is likely but a bad inflation result could produce a half-percent rise.

Even without a rate rise, it appears just the talk of one may be enough to help rein in the economy with a 5 per cent fall in Westpac/Melbourne Institute consumer sentiment index this month attributed to fears of a rising rates.

The International Monetary Fund is quite bullish on world recovery, predicting a return to strong growth by the end of the year. So even our export markets, now on the wane and one of the few areas detracting from our healthy growth, may not be down for too long.

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