Rate rise looms as inflation rises

Another round of interest rate rises  became a virtual certainty today, when the Australian Bureau of Statistics reported that the nation’s inflation rate is rising.

The Consumer Price Index rose by 0.5 per cent in the final three months of last year, to produce an annual headline inflation rate of 2.1 per cent.

That’s up from 1.3 per cent in the 12 months to the end of September.

The Reserve Bank aims to keep Australian’s inflation rate in a 2-3 per cent range, over the course of a business cycle.

However, it uses what it calls an underlying inflation rate, not the bureau’s raw CPI figures, to make its calculations.

And, on that measure, Australia’s inflation rate – at 3.6 per cent – is already above the bank’s target range.

The fact that if fell slightly – from a revised 3.7 per cent – at the end of the September quarter won’t help homebuyers avoid another rate rise.

As the private forecaster Access Economics noted earlier today, a point above the Reserve Bank’s tolerance line is not a good starting place, as an economic recovery gets under way.

“Interest rates will head up alongside the Australian and global recoveries, as they should,” Access director Chris Richardson said.

The Reserve Bank board will meet next Tuesday to review the bank’s marker rate, which now stands at 3.75 per cent.

Mr Richardson said that rate would probably hit 5 to 5.5 per cent by the first half of next year.

Other information, also released today, confirms that another rate rise, as early as next month, is now even more likely.

The Westpac Bank reported that its leading indicator, which points to the likely pace of economic activity over the coming three to nine months, surged in November.

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3. Inflation rises – and spreads