RBA to lift rates in August: economists

The central bank has made it clear a rate rise is expected in the second half of 2011 after lifting its inflation forecasts for the next two years, economists say.

The Reserve Bank of Australia expects underlying inflation to hit three per cent by December - one year earlier than it forecast in February.

In its quarterly Statement on Monetary Policy, published on Friday, the bank cited further tightening of the labour market and the likelihood of a significant pick-up in the mining sector as inflationary risks.

The RBA kept its cash rate at 4.75 per cent at its May board meeting, after last raising it in November 2010.

CommSec chief economist Craig James said he expected the RBA to hike rates in August after the RBA slashed its near term growth forecasts.

GDP growth in June had been tipped at 3.25 per cent, and now it is assumed to be 2.5 per cent.

"As usual, the domestic forecasts have been prepared under the technical assumption
that the cash rate moves broadly in line with market pricing; this implies an increase in the cash rate of ¼ percentage point by early 2012 and a further ¼ percentage point increase by mid 2013, a slower rise than suggested by the forecasts of market economists," Mr James said.

St George Bank chief economist Besa Deda said the language in the RBA's statement was more hawkish than the short statement released after Tuesday's rate decision, because it clearly warned the cash rate needed to rise.

JP Morgan chief economist Stephen Walters also said the RBA's message was clear.

"It's all pretty clear that seemingly the anxiety about the inflation outlook has got a bit worse and I think they're trying to send the message that interest rates are going up here," Mr Walters said.

JP Morgan predicts the next rate rise will be in August.

"We don't think there's a mad rush here," Mr Walters said.

"We thought they'd raise their inflation forecast, but the fact that they're forecasting above target core inflation in two years time is pretty clear."

Citigroup economist Paul Brennan believes the RBA statement is "very hawkish".

"It ramps up their rhetoric and goes beyond the governor's statement earlier in the week," he said.

"In particular, they make crystal clear their guidance that interest rates are going to have to rise, whereas it's quite in contrast to what the market's been pricing.

"So clearly they've got an eye on jawboning those market expectations."

He said the RBA did not seem too worried about the current slowdown in the economy.

"They're thinking that it's going to quickly give way to a re-acceleration to above trend growth, which will persist for a couple of years ... obviously they're very bullish on the mining and energy capex (capital expenditure) through quickly."

ICAP senior economist Adam Carr agrees the statement indicates the RBA will soon make a move on rates.

"They expect core inflation to be three (per cent) by year end and basically to stay there for a couple of years," he said.

"Under any reasonable criteria, it would suggest that we're seeing a near-term rate hike."

However, he expects three rate rises in 2011, the first in June.

"They've got strong growth, strong inflation (and) global growth is strong," he said.

"I don't know what the dovish case is."