Rising inflation has made an rate rise even more likely at next week’s central bank meeting. Expectations are about 0.25 percentage point, which would take the cash rate to 4 per cent.

Australia’s consumer price index rose 0.5 per cent in Q4 from the previous quarter. While this was just half the Q3 rise of 1 per cent, it pushed the annual rate of inflation up to 2.1 per cent. Read more

An imminent rise in the interest rate is unlikely. The Reserve Bank of Australia said it was in a suitably “flexible” position following three consecutive rate increases. Indeed, it transpires there was some debate over the last increase of 25bp. Minutes of the RBA meeting on December 2 noted: “The question … was whether it was more appropriate to take a further step at this meeting or to hold the cash rate steady pending a further evaluation of developments.”

The Reserve Bank of New Zealand held its official cash rate at 2.5 percent, as expected, with central bank governor Alan Bollard forecasting earlier-than-expected tightening in mid-2010. Like neighbour Australia, New Zealand’s central bank is factoring in the wider gap between the benchmark rate and funding costs in its rate decisions. A higher currency and higher long-term rates have also reduced the need for immediate action.

Glenn Stevens said on Tuesday that the central bank will take rising Australian mortgage rates into account when it sets monetary policy. The governor of the Reserve Bank of Australia also said a “neutral” level for Australian interest rates may be lower than previously forecast with widening margins between benchmark and mortgage rates. Read more