The inflation report for the June quarter will be released Wednesday, and many economists expect it will convince the Reserve Bank to raise the overnight cash rate yet again—sooner or later.

If the underlying inflation pressures measure 0.7% or less in the quarter, that will raise the annual rate to 2.9% or 3.0%. In such a scenario, the RBA is likely to keep interest rates steady at 4.5% at their August meeting.

But if the underlying quarterly rate measures 1.0% or greater, that would raise the annual rate above the RBA’s preferred 3.0% upper limit. If that happens, then a 25 basis point rate rise to 4.75% is almost a certainty, barring a serious incident in overseas economies.

A quarterly measure greater than 0.7% but below 1.0% could go either way, depending upon how the RBA debate goes.

The majority of economists predict quarterly inflation will print 0.7% and the RBA will hold rates steady at the August 3 meeting. Unfortunately, the economists also believe that will only delay the inevitable. It’s only a matter of time, they say, before rates rise again, with an increase of a full percentage point before the end of next year the most common prediction.

With the economy improving, the jobs market tightening, the value of exports soaring, and overseas capital arriving daily, inflation is already at the upper end of the RBA’s target band of 2–3%. So the prediction of higher interest rates isn’t a difficult one.

The economists making these predictions include:
•    Alan Oster, chief economist with NAB, who expects the RBA to hold rates steady in August but raise them 25 bps in November and December, with rates reaching 5.5% in July 2011.
•    John Peters, senior economist with the Commonwealth Bank, who forecasts the RBA may lift rates in August no matter what quarterly inflation prints and who believes rates could be at 6.0% by December 2011.
•    Phil O’Donaghoe with Deutsche Bank, who considers the situation “fluid” but predicts rates to reach 5.75% by December 2011.
•    Shane Oliver, chief economist with AMP Capital, who expects the RBA to pause in August but raise rates to 5.5% by July 2011.

Source: http://www.businessday.com.au/business/warning-your-mortgage-is-going-up-20100724-10prc.html