KEY POINTS:
The Reserve Bank of Australia is set to increase interest rates today for the second time this year, in a move that will almost certainly see rates return to the centre of the election campaign.
It will be the first time rates have been hiked in the middle of a federal election and is likely to test the political resolve of Coalition Prime Minister John Howard.
Howard was returned to office in 2004 on the promise of keeping interest rates low, or at least lower than they would be under a Labour government.
But rates have been raised five times since the 2004 election due to higher inflation - one of the downsides of a rampant economy and tight labour market conditions.
The expected move, after an RBA board meeting, is also likely to test the resolve of the central bank, which has never before raised rates during an election campaign.
RBA governor Glenn Stevens has stressed, however, that the bank would not hesitate to raise the official cash rate if economic conditions demanded such action, regardless of when an election was held.
And with the latest consumer price index figures showing annual underlying inflation at 3 per cent - the top of the RBA's 2 to 3 per cent target band - most economists believe a rate hike is a done deal.
All 19 economists surveyed recently by AAP last month predicted rates to rise by a quarter of a percentage point to 6.75 per cent - their highest level since July, 1996.
The chance of a rate hike was given a further boost with another inflation report showing price pressures continued through October.
The TD Securities-Melbourne Institute monthly inflation gauge showed prices increased by 0.3 per cent last month, following a 0.2 per cent rise in September, for an annual headline inflation rate of 3.3 per cent.
The underlying rate of inflation, meanwhile, surged to 3.2 per cent over the 12 months to October, TD Securities said.
"All our yearly measures of inflation - whether it be the headline gauge ... or the core measure - they were all above the top of the Reserve Bank's 2 to 3 per cent target zone," TD Securities senior strategist Joshua Williamson said.
Williamson said the RBA was all but certain to raise rates today, but also warned of the likelihood of at least another rise in the coming months.
"We're fully expecting a rate rise ... but whether there is a hawkish accompanying statement I think probably now is the most important point, given the market has decided the rate rise is inevitable," Williamson said.
"It's the tone of that statement that is going to set the scene for how the RBA views monetary policy.
"Of course, we'll get a bit more of feel for that when the RBA releases its statement on monetary policy on Monday," he said.
- AAP