The RBA on Wednesday left the cash rate at 6.50%, after last raising it by 25 basis points in August. Economists had been unanimous in their expectation that interest rates would remain unchanged following Tuesday's board meeting. Citigroup director of economics Annette Beacher said the decision was largely expected given the recent rise.

She said the central bank would want to see how inflation fared in the September quarter to determine if another rate rise is needed. The September quarter consumer price index (CPI) will be released on October 24.

Beacher commented: "I think that they've (the RBA) been fairly clear that there is a tightening bias on the table, but the actual presence of another trigger is absent at this stage. Worse than expected inflation results in coming quarters would trigger another rise, with inflation to increase and interest rates to rise by 25 basis points in the first quarter of 2008"

Market jitters 'will subside'

JPMorgan economist Jarrod Kerr said the recent turbulence in global financial markets would have also prevented a rate rise this month, with higher inter-bank lending rates partly acting as an unofficial rate rise.

He said the central bank would also need time to assess the impact of the credit crunch on the Australian economy. Kerr said credit market jitters would subside in coming months, and higher inflation from rising food, electricity and wages costs would prompt the RBA to raise interest rates as early as December.

"We think we'll see high inflation rates in the next few quarters and the RBA can't ignore that.  We're expecting wages to grow given the unemployment rate is at a three-decade low," he said.

ANZ economist Amber Rabinov said low unemployment combined with personal income tax cuts and more generous superannuation arrangements were supporting consumer spending power and placing increased pressure on inflation.

Strong retail sales

She said Wednesday's stronger than expected retail sales figures indicated that Australian household confidence was in good shape. Retail sales rose 0.7% in August to $A19.684 billion, Australian Bureau of Statistics (ABS) figures showed.

Economists had forecast an increase of only 0.4% in the month. "Moreover, these figures come despite a 25 basis point rise in interest rates to 6.50%, global financial markets turmoil and a related drop in equity markets in August," Rabinov said.

"The case for another interest rate rise is building. The RBA will remain on the sidelines until it sees further signs that financial markets have stabilised. However, a strong September quarter CPI outcome will make the RBA's November board meeting very interesting indeed," she said.