Cup day rate hike guaranteed after inflation rises

By Stuart Fagg, ninemsn Money

Interest rates could rise by as much as 50 basis points next week after inflation data showed the cost of living is rising quicker than expected.

A 50 basis point move would add nearly $100 to the monthly repayment on the average $300,000 mortgage.

The Consumer Price Index (CPI) rose by 1 percent in the September quarter, as rising costs for electricity, petrol and housing offset falls in the prices of fruit and vegetables, according to the Australian Bureau of Statistics.

The Australian dollar rose after the release of the data on expectations that the central bank will hike rates next week.

Economists had been expecting prices to rise by 0.9 percent.

However, some analysts believe the Reserve Bank will eschew a larger rate hike in favour of another 25 basis point hike, which would take the cash rate to 3.50 percent.

"We still see rates rising by 25 basis points next week," Amanda Tan, treasury economist at St George Bank told ninemsn. "The headline CPI was stronger than expected and will support the view that there are more rate hikes in the coming months."

ANZ economist Dr Alex Joiner said the inflation data would not be enough to prompt the RBA to shift rates by 50 basis points, but that the central bank will likely raise rates in next week and again in December.

"Today's read is fairly neutral for rates markets in the short term and will be unlikely to prompt a 50bps move from the RBA on Cup Day," he said. "We still tip a 25 basis point move in the first week of November, the risk is now that this will be followed up in December."

The Reserve Bank has been warning that rates will rise in recent weeks and raised rates by 25 basis points earlier this month, adding $45 to the monthly repayments on a $300,000 mortgage.

While the headline CPI rose by 1 percent, the trimmed mean CPI rose 0.8 per cent in the September quarter, for an annual growth rate of 3.5 per cent. The trimmed mean rate, or underlying inflation, is the Reserve Bank's preferred measure of inflation.

RBA’s target for inflation is between 2 and 3 percent per year.

The weighted median CPI rose 0.8 per cent in the September quarter, with an annual rise 3.8 per cent.