Rates may rise in August: economists

Borrowers have avoided an extra squeeze on their finances after the Reserve Bank of Australia (RBA) paused on interest rates for a second consecutive month.

But economists warn concerns about stubborn inflation could prompt the central bank to lift rates as early as August.

The RBA left the cash rate at 4.5 per cent for a second-straight month on Tuesday, as expected.

"The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade," RBA governor Glenn Stevens said in a statement accompanying the decision.

"Pending further information about international and local conditions for demand and prices, the board views this setting of monetary policy as appropriate."

JP Morgan chief economist Stephen Walters said the RBA's statement contained a "subtle" shift in the tone towards a lift in the domestic economy and future rate rises.

"That is, the Aussie economy is travelling along nicely and inflation is stubbornly high," Mr Walters said.

"As such, we believe this tightening cycle still has some way to run."

The central bank lifted the cash rate from 3.0 per cent to 4.5 per cent between October 2009 and May this year.

Mr Walters forecast the RBA to lift the cash rate by a quarter of a percentage point to 4.75 per cent next month, after the Australian Bureau of Statistics (ABS) releases June quarterly inflation data on July 28.

Australia's underlying inflation rate, the RBA's preferred measure as it removes volatile price movements, was an annual 3.05 per cent in the March quarter.

The RBA noted underlying inflation was likely to remain in the upper half of the bank's target of two to three per cent over the next year.

"The rate of CPI (consumer price index) increase is likely to be a little above three per cent in the near term, due to the effects of increases in tobacco taxes announced earlier in the year and significant increases in prices for utilities," the RBA said.

RBC Capital Markets senior economist Su-Lin Ong forecast underlying inflation to print at 0.8 per cent in the June quarter for an annual rate just above three per cent.

"This may be enough to push the RBA over the line at the August board meeting, but this would also demand some stability in global markets and data," Ms Ong said.

"The hurdle to hike has clearly risen given the global uncertainty and the risk remains that this current pause may turn into one that is more protracted."

Citigroup managing director of investment and research analysis, Paul Brennan, said the board noted the risks from offshore but also acknowledged the strength in the local economy.

"They continue to highlight the high commodity prices with the terms of trade," Mr Brennan said.

"They have not changed their forecast for growth. They have slightly nudged up their inflation forecast but they don't see that as a trigger to raise interest rates."

Australian's trade balance was a surplus of $1.645 billion in May, its second monthly surplus in a row, ABS data showed on Tuesday.

Mr Brennan forecast the RBA to lift the cash rate to 4.75 per cent in the final quarter.

ICAP senior economist Adam Carr said recent pricing on debt futures markets of a greater chance of the RBA cutting rates rather than lifting was not feasible.

"But make no mistake, the RBA is not entertaining the idea of a cut," Mr Carr said.

"At best they'll push out plans for further rate increases."

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