Australians expect jump in rates

SYDNEY - Economists see a better than 50 per cent chance of another interest rate increase by the Reserve Bank of Australia this week, and agree that any move will likely be the last this year.

The central bank holds its monthly board meeting tomorrow. It last raised its cash rate to 5.5 per cent from 5.25 per cent at last month's meeting, its first rise in more than a year.

The bank cited risks to the inflation outlook from higher wage demands in a tight labour market, and from capacity constraints from 14 consecutive years of economic expansion.

The bank has raised rates in groups of two, as in November and December 2003, and in May and June 2002.

"You have to put a high probability on something happening tomorrow. If they do, nobody is going to be surprised," said Michael Blythe, chief economist at the Commonwealth Bank of Australia.

However, Reserve Bank Governor Ian Macfarlane has indicated interest rate adjustments are likely to be small.

"The fact that the household sector is carrying so much more debt means that monetary policy is, in some sense, a more powerful weapon and has to be used sparingly and delicately," Macfarlane said in his February testimony to Parliament.

As such, Blythe is leaning more to a rate rise next month rather than now. By May, the Reserve Bank would have seen the first-quarter consumer price index due on April 27 and other gauges of inflation.

A Reuters poll of 20 economists gave a 60 per cent chance of an increase this week. The poll found most looking for a rise to 5.75 per cent by the end of June, but no one believed rates would be any higher than 5.75 per cent by year's end. Data since the March 2 rate rise have been thin on the ground, but apart from a sharp drop in March consumer sentiment after the rise, economic indicators have been generally firm.

The consumer sentiment data were collected after the rate rise, but other February reports were taken at a time when the central bank was warning that rates were likely to go higher.

Notably, the unemployment rate stayed at a 28-year low of 5.1 per cent for a third consecutive month in February and this is expected to stretch to a fourth month when the March labour force report is released on Thursday.

Hiring intentions also remained strong, suggesting the labour market will get even tighter, while credit demand remained solid.

Although the central bank's main focus has switched to inflation from housing and associated debt, it has since reiterated a warning that household debt remains high.

- REUTERS