The Reserve Bank of Australia could lift interest rates tomorrow after a key reading on inflation rose yet again.
That will give the central bank the luxury to pause in its rate increase cycle to see how the economy is going.
The TD Securities Melbourne Institute Monthly Inflation Gauge rose by 0.1 per cent in September, following a 0.2 per cent rise in August and a 0.1 per cent rise in July.
In the twelve months to September, the Inflation Gauge rose by 3.2 per cent, breaching the upper bound of the RBA's two to three per cent inflation target band.
TD Securities senior strategist Annette Beacher said the data showed the official inflation gauge, the September quarter consumer price index would be benign and not give the RBA a trigger to raise the cash rate from November onwards.
But tomorrow's decision is a very close call, she said.
"Ongoing hawkish rhetoric from senior RBA staff members has placed the markets on notice, and so we believe the RBA should follow up the rhetoric with a 25 basis point tightening after tomorrow's Board meeting, and then start its Christmas vacation early," she said in a statement today.
The futures market is currently pricing in about a 60 per cent chance the central bank will take the rate from 4.5 per cent to 4.75 per cent tomorrow.
If the RBA raises the rate, there is a high expectation commercial banks will follow up with their own rate rises on mortgages and give the central bank enough reason to hold the cash rate at 4.75 per cent until 2011.
A 25 basis point rate rise will add about $50 a month to repayments on a $300,000 mortgage.
"We expect the variable mortgage rate to be lifted by considerably more than the 25 basis point increase in the cash rate, ameliorating the need for any additional RBA action this year," Ms Beacher said.
"Whatever the retail bank announcements are, Australia will have the dubious honour of having a restrictive monetary policy stance."
Contributing most to the monthly rise in the rate of inflation were price rises for alcohol and tobacco, fruit and vegetables, and holiday travel and accommodation, the survey showed.
These were offset by falls in prices for automotive fuel, rents, and audio, visual and computing equipment.
The price of automotive fuel fell 4.4 per cent in September, while rent prices fell by 0.9 per cent in the month.
The Australian bureau of Statistics is due to publish its September quarter CPI on October 27.
AAP