The Reserve Bank of Australia (RBA) is likely to lift interest rates next week despite consumer price data showing the slowest annual rate of inflation in a decade, economists say.

But the impending hike is unlikely to be as large as 50 basis points expected by some market analysts, with the interest rate now forecast to lift 25 basis points to 3.50 per cent.

Australia’s headline consumer price index (CPI) rose 1.0 per cent in the September quarter, for an annual rate of 1.3 per cent, the Australian Bureau of Statistics (ABS) said on Wednesday.

It was the slowest annual pace for headline inflation since the June quarter of 1999, when it printed 1.1 per cent. The annual rate in the year ended June was 1.5 per cent.

The results were slightly above market forecasts for a quarterly rise of 0.9 per cent and an annual increase of 1.2 per cent in headline inflation.

“That tells you that a cash rate at 3.25 per cent is too low,” RBC Capital Markets senior economist Su-Lin Ong said.

“The RBA is going to keep lifting – we continue to favour a 25 basis points hike next week followed by another 25 basis points in December.

“There is nothing in here that is supportive for a 50 point move.”

The ABS also calculated the weighted median and trimmed mean measures of inflation, which the central bank uses a gauge of the underlying trend in inflation.

The average of these two measures rose 0.8 per cent in the September quarter, for an annual rate of 3.5 per cent.

Economists had forecast underlying inflation to rise by 0.7 per cent in the quarter for an annual pace of 3.45 per cent.

On October 6, the RBA became to first G20 central bank to lift its base rate, after its board voted for a 25 basis point increase to 3.25 per cent. It was the bank’s first rate rise since March 2008.

Ms Ong said the RBA was trying to dampen inflation before Australia’s economic recovery really gathered pace.

“That core inflation is still above the target range and the RBA still looks for trend growth next year, that is telling you the RBA probably wants rates to be neutral rather than at stimulatory levels,” she said.

A neutral interest rate is assumed to be between five and six per cent.

Within an hour of the CPI data being published at 1130 AEDT, the debt futures market had fully priced in a cash rate of 4.25 per cent by March next year.

Commonwealth Bank of Australia chief economist Michael Blythe said he favoured a 25 basis point rate hike next week.

But he also said the fundamental price drivers in the third quarter inflation report pointed ongoing to disinflation.

“Upstream price pressures are dissipating … labour cost growth is slowing … import prices are falling … the global output gap is widening and the Aussie dollar is rising,” he said.

“The RBA’s inflation concerns look a little odd against this backdrop.”

The third quarter report showed any significant price rises were in areas heavily influenced by state and federal government policy.

Water and sewerage was up 14.1 per cent in the quarter, electricity was 11.4 per cent higher and automotive fuel rose four per cent.

A 1.2 per cent rise in alcohol prices reflected the regular indexation of excise rates, while part of the lift in petrol prices reflected the removal of Queensland government subsidies, Mr Blythe said.

“(But) the story runs both ways here – the operation of the Pharmaceutical Benefits Scheme safety net helped reduce CPI growth,” he said.

Meanwhile, Housing Building Association senior economist Ben Phillips said the inflation data should give the RBA reason to keep rates on hold next week.

“Such a result is hardly a sign of inflation running out of control,” he said in a statement.

“Large interest rate hikes should be viewed as both unnecessary and dangerous and will likely dampen the much needed housing recovery, especially rental investment, across the country.”