THE central bank will have to raise the cash rate above 4.5 per cent this year, but there is no indication when the first increase will occur, economists say.
The Reserve Bank this week surprised financial markets by leaving its key cash interest rate unchanged at 3.75 per cent.
It said in a statement today it was waiting to see the economic impact of three official rate hikes in the final quarter of 2009 and accompanying rate increases by commercial lenders before deciding whether to move again.
The RBA continues to expect an improvement in economic growth over the next two years as domestic demand increases.
In its statement, the RBA outlined its central forecast for the economy to grow at around 3.25 per cent and 3.50 per cent in 2010 and 2011, which would be much stronger than 2009.
The RBA is now looking for annual growth of two per cent for the year, against the current expectation in financial markets for around one per cent.
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National Australia Bank chief economist Robert Henderson said the RBA had "clearly reiterated its reasons for pausing in February".
"Having tightened up significantly in the previous period they just didn't believe there was enough time to gauge the impact of the tightening so far on the economy," Mr Henderson said.
The forecast for underlying inflation at the end of December 2101 was raised to 2.5 per cent, from a previously projected 2.25 per cent, with the CPI at 2.5 per cent, higher from an estimated 2.25 per cent before.
"That increase was done based on expectations of interest rates that basically tracked the market's expectations, so that's basically a 4.5 per cent cash rate by December 2010 and even with that higher cash rate they still raised their inflation forecast," Mr Henderson said.
"Particularly for June 2012 and December 2011, they have raised it 2.75 per cent so that says to us that even with the cash rate going up 4.5 per cent it doesn't stop the inflation trend going higher.
"That to us means that they need rates higher than 4.5 per cent by the end of the year."
However, he said the RBA had given indication as to when it would next move to lift interest rates.
"None whatsoever that I can see, but certainly it shows you why they can did say in the statement on Tuesday that it's likely that cash rates will need to rise further over time, just because they have already got an inflation forecast that sees inflation bottoming and then starting to trend higher."
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