CANBERRA, AAP – Economists and financial markets are factoring in an interest rate hike when the Reserve Bank of Australia board meets on Tuesday, regardless of being in the middle of a federal election campaign.

There was a marked change of thinking after the latest inflation figures on Wednesday saw the annual consumer price index spike to 5.1 per cent from 3.5 per cent, its fastest pace in over two decades.

Importantly, annual underlying inflation – which smooths out volatile price swings and is more crucial to the interest rate outlook – also jumped to 3.7 per cent, its highest result since 2009.

It is well above the RBA’s two to three per cent inflation target.

“Australia’s inflation dynamics have changed,” Deutsche Bank Research chief economist Phil O’Donaghue said.


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He said the RBA has a very narrow window of opportunity to avoid a US-style inflation spiral.

“Federal election or not, it should act now,” he said.

Financial markets have priced in the risk of a 0.15 per cent rise in the cash rate to 0.25 per cent when the board meets, which will mark the first increase since November 2010.

RBC Capital Markets chief economist Su-Lin Ong has also brought forward her rate thinking, expecting a a 0.15 per cent rise in May and a 0.25 per cent increase in June, rather than being in June and July and after the May 21 election..

“Moving both during the election campaign and then again immediately after the federal election … may well take some of the politics out of this impending tightening cycle,” Ms Ong said.

It will be the first time the central bank has shown its independence since hiking during the November 2007 election campaign, a poll lost by former prime minister John Howard.

Prime Minister Scott Morrison said interest rates are for the independent RBA to decide but noted then the cash rate was over six per cent in 2007, when now it is just 0.1 per cent.

Meanwhile, the Australian Bureau of Statistics will release its import and export price indexes for the March quarter on Thursday.