Rising inflation sparks rate uncertainty

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A new survey has revealed that inflation is inching higher, giving rise to speculation that the Reserve Bank of Australia could raise rates later this year.

The TD Securities Melbourne Institute’s monthly survey indicates that inflation rose 0.2% in August - the tenth consecutive monthly increase.

According to the Sydney Morning Herald, the rise follows a 0.1% increase in July and 0.3% rise in June.

But official inflation figures for the second quarter indicated a 0.6% increase, following a 0.9% rise in the first quarter.

The RBA has a target inflation range of between 2-3%.

While economists are predicting rates will remain unchanged after the board meets tomorrow, the probability of future rate rises has increased.

"In our view, further increases to the cash-rate would be unwarranted in an environment where the housing market and inflation are both subdued," said Sal Carrero, chief executive of Chan & Naylor. "Any rate increase would also add unnecessary hardship to the many small to medium business owners who are suffering the double impact of subdued activity and relatively high interest rates compared to the majority of borrowers."

According to Carrero, the inflationary pressures in the housing sector are in the rental market and a product of poor urban planning and land release strategies.

"The growth in rental prices reflects high market demand and points to broader problems with the planning system. We’re simply not building enough houses,” he said.

Nomura International economist Stephen Roberts told the SMH that the RBA could hike rates after third quarter inflation data is released.

"We see the RBA hiking by 25 basis points in November, with two further 25 basis point hikes in December and February - taking the cash rate to 5.25% in the first quarter 2011."

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