INTEREST rates could hit 7.5 per cent later this year after another "shocking" jump in prices during April.

The predicted interest rate rise underlines inflation's position as public enemy number one.

The Reserve Bank is widely tipped to leave interest rates on hold at 7.25 per cent at today's board meeting.

But the market has swung from expecting interest rates to fall later this year to a growing belief the RBA's next move will be yet another rate rise to counter inflation.

Underscoring the change of thinking about rates was the Australian dollar's surge of more than half a cent to US94.12 yesterday.

The latest inflationary data, just a week ahead of the Federal Budget, shows the rate of price rises continuing to climb.

The TD Securities/Melbourne Institute inflation gauge for April, released yesterday, showed significant jumps in fuel and rental costs, pushing the annual rate to 4.3 per cent.

TD Securities strategist Joshua Williamson said the inflation reading was "a truly shocking result" and Australia was clearly in the grip of an inflation spiral.

This is the third consecutive month that the gauge has put annual inflation above 4 per cent.

Commonwealth Bank chief economist Michael Blythe is forecasting the RBA will leave interest rates on hold today before lifting to 7.5 per cent in the next few months.

He said strong commodity price rises in iron ore and coal would provide the economy with a "massive stimulus" and boost household spending over the next few months.

"We see a good chance of higher interest rates over the next few months while there appears to be a slowdown in demand coming through," Mr Blythe said.

"You have to wonder how long that will last.

"And I wouldn't entirely rule out something happening at the May meeting but the odds are against it."

Mr Blythe said one more rate rise to 7.5 per cent would be enough to secure the much-needed slowdown in economic growth.

Investors put the possibility of interest rates jumping to 7.5 per cent as a 70 per cent chance by October.

But economists said the RBA needed to hold its nerve for at least another month or two to weigh up the contrasting factors of a slowing economy and rising inflation.

Deutsche Bank economist Phil O'Donoghue said there would be robust debate at today's RBA meeting because of the inflationary pressures but the board was likely to keep rates on hold at 7.25 per cent.

"The RBA has been aided in its job by the major commercial banks, who are doing a lot of the work for them," he said.

"Since January the top 10 mortgage lenders have, on average, increased their borrowing rates by 38 basis points above the RBA's rate rises. This is more than one whole RBA rate rise."

But Mr O'Donoghue also forecasts that any sign the domestic economy may be getting ready to ramp up again will force the RBA to raise rates once more this year.

"The bank is still more likely to raise rates than cut them," he said.

And there are no guarantees the banks will not raise lending rates again as the global cost of capital remains stubbornly high.

TD Securities' Mr Williamson said: "The trick for the RBA will be in balancing the already significant tightening of financial conditions and a slowing economy against the possible need for higher interest rates.

"Certainly a rate cut before year-end is looking an increasingly remote possibility as inflation remains at a level well above the RBA's target," he said.

"If April's strong increase in inflation continues in the months ahead and is reflected in the official CPI data, the RBA may even be tempted to increase interest rates despite clear evidence of a slowing in domestic demand."

The RBA's belief that the economy is slowing will have been aided by a slew of data yesterday showing an easing in the housing market and softer demand for jobs.

The Australian Bureau of Statistics house price data rose 1.1 per cent in the March quarter - its slowest growth in a year.

The ANZ job advertisements survey, released yesterday, was up 3.1 per cent in April - ending two months of declines.

ANZ economist Tony Pearson said that after consistent growth last year jobs advertisements seem to be plateauing.

"We would expect this to foreshadow a slowdown in the monthly trend rate of growth in employment," Mr Pearson said.

http://www.news.com.au/heraldsun/story/0,21985,23651315-664,00.html

The Herald Sun May 6th 2008