Interpac Business and Migration Solutions Melbourne Australia

ECONOMISTS believe interest rates are virtually certain to rise despite consumer price index figures yesterday showing inflation clocked in at a modest 2.1 per cent in 2009.

Australian Bureau of Statistics figures showed the CPI rose 0.5 per cent in the three months to December, with the biggest price rises recorded for fruit, which jumped 15.9 per cent because of shortages.

House prices, rent, beer and domestic travel and accommodation prices also recorded sizeable increases in the December quarter, while petrol prices fell 2.8 per cent and computers, TVs and pharmaceuticals also dropped significantly.

The annual headline inflation rate of 2.1 per cent in 2009 is at the bottom of the Reserve Bank's 2 to 3 per cent target.

But when it sets interest rates, the central bank looks at underlying or core inflation - which removes unusually large price rises and falls for items in the CPI's ''basket'' of goods and services. It also aims to head off emerging inflationary pressures.

Yesterday's figures showed underlying inflation higher than the headline rate. Underlying inflation was 0.6 per cent in the December quarter and between 3.2 and 3.6 per cent over the year to December.

Market economists said the level of underlying inflation, together with signs of strong recovery, would prompt the Reserve board to lift the official cash rate by 0.25 of a percentage point next Tuesday.

This would take the interest rate on a typical standard variable rate home loan to 6.9 per cent, lifting repayments on a $300,000 mortgage by $62 a month if banks pass on the increase in full.

ANZ Bank economist Alex Joiner said underlying inflation was uncomfortably high while the economy was rapidly returning to stronger growth.

Dr Joiner said recent healthy growth in jobs, , retail sales and consumer confidence ''paint a picture of an economy in an advanced state of recovery'', virtually ensuring that interest rates would rise 0.25 of a percentage point next week.

BT Financial Group chief economist Chris Caton said the Reserve would lift rates but not because of inflation. ''Monetary policy has switched focus quickly from limiting the damage to managing the recovery, and the Australian economy simply no longer needs artificially low interest rates,'' he said.

Australian Industry Group chief executive Heather Ridout called on the Reserve to leave rates unchanged.

Prime Minister Kevin Rudd said there would be increases in interest rates as economies recovered.

(Source from: theage.com.au)