The Reserve Bank of Australia (RBA) is likely to lift interest rates by 25 basis points on Melbourne cup day, as it continues on its path to a “neutral” monetary policy setting of five to six per cent.

But some analysts believe the market is facing a “live risk” of a 50 basis point rate rise as the bank tries to reign in the still-present threat of high inflation.

All 17 economists surveyed by AAP this week believe the RBA will lift the three per cent cash rate after its board meets on Tuesday November 3, with 15 plumping for a quarter of a percentage point lift to 3.50 per cent and two for a lift to four per cent.

AMP Capital Investors senior economist Bob Cunneen said he expected the central bank to lift rates by 25 basis points, but he said a 50 basis point rise was still an option.

“It’s going to be a close call,” he said.

“I think there’ll be a proposition put to the board to raise interest rates half a per cent.

“But it will be at the board’s discretion to be a bit more cautious.”

It will be the RBA’s second rate rise in as many months, after it took the cash rate to 3.25 per cent, from its 49-year-low of three per cent, on October.

It was Australia’s first rate rise in 19-months and the RBA became the first G20 central bank to lift its cash interest rate since the global financial crisis began in mid 2008.

In a speech in Perth soon after that hike, RBA governor Glenn Stevens warned it would be a mistake by the bank to be “too timid” in raising interest rates in response to a brighter economy.

That speech heightened market expectations of a 50 basis point rate rise in November, TD Securities senior strategist Annette Beacher said.

“The `timid’ speech really got us nervous,” she said.

TD Securities are officially forecasting a 25 basis point rate rise next week.

Meanwhile, the minutes of the RBA’s October meeting showed board members were concerned that underlying inflation was still above the central bank’s two to three per cent target range.

“Keeping interest rates at very low levels for an extended period could therefore threaten the achievement of the inflation target over the medium term,” the minutes said.

Official inflation data published this week showed the average of the RBA’s two underlying inflation measures rose 0.8 per cent in the September quarter, for an annual rate of 3.5 per cent.

But the Australian Bureau of Statistics (ABS) data also showed headline inflation figure, which the RBA uses as a short term gauge of inflation, grew by 1.0 per cent in the September quarter, for an annual rate of 1.3 per cent.

It was the slowest annual pace for headline inflation in more than a decade.

The debt futures market has since backed off from a 50 basis point rate hike and is now fully pricing in a 25 basis point rise next week.

“There’s not a strong argument for 50 basis point rise at all,” Ms Beacher said.

“The (inflation) data was probably not terrific, but it was certainly not worse than expected.

“If it was, I would have probably supported the 50 camp. There is not enough evidence to ramp up their tightening.”

RBC capital markets senior economist Su-Lin Ong predicted a steady drumbeat of rate rises between November and March, as the RBA moves towards a neutral setting of five to six per cent by the end of calendar 2010.

“The RBA has moved preemptively (last month) and as a result they can afford to continue to move in modest steps, I don’t think there is really a strong case for 50 basis points at the moment,” she said.

“There is a strong case for removing the excessive stimulus and getting back towards more neutral levels.

“They have sent the right signals, it is a very measured strategy and I don’t think they need to step it up.”