1 Aug 2011

Inflation could herald rise in interest rates

7:00 am on 1 August 2011

A surprise jump in inflation has given the Reserve Bank of Australia an almighty dilemma.

The June quarter CPI showed that core inflation is running at an annualised rate of 3.5%, well above the bank's target zone of 2% - 3%.

What's more, Radio New Zealand's Sydney correspondent says this is happening as consumers cut spending in favour of saving, the housing market starts to tank and sectors outside resources struggle.

While much of the inflation spike was caused by the impact of the Queensland floods on food prices - particularly for bananas - the labour market remains tight and productivity is slowing.

That's the recipe, say some, for an increase in interest rates.

The RBA board is to meet on Tuesday. Markets are pricing in a slight chance that the bank will raise the official cash rate for the first time since November, but the consensus is that rates are more likely to stay on hold at 4.75%.