Citi predicts 1% rise in official interest rate this year

The Reserve Bank (RBA) will be forced to lift the official cash rate sooner than expected this year, a leading analyst has said.

Citi chief economist Paul Brennan argued that while the RBA's recent quarterly review suggested that inflation would rise only gradually this year, the acceleration of the mining boom and the impact of the huge flood rebuilding effort in Queensland would put unforeseen pressure on interest rates.

Speaking to The Australian, he said he therefore expected an official rate increase of 100 basis points, or one percentage point, this year, which will be backloaded into the second half of 2011.

"We continue to expect more tightening than currently priced by markets will be required to ensure that the large change in relative prices driven by the commodity boom doesn't spill over into a deterioration in inflation expectations," he said.

"We also suspect the RBA is underestimating the inflation pressure created by the flood rebuild against this backdrop of a mining and energy investment boom."

The comments come after the RBA opted to keep the official cash rate at 4.75 per cent last week.

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