The Reserve Bank of Australia (RBA) has again warned that interest rates will likely rise further this year, lifting its forecasts for both economic growth and inflation.

But financial markets are not overly confident that another increase in the official cash rate will happen anytime soon, suggesting homeowners may be able to breath more easily for at least a couple of months.

The central bank released its quarterly monetary policy report on Friday, expanding on this week’s post-board meeting statement by governor Glenn Stevens when the cash rate was unexpectedly left at 3.75 per cent.

“Looking forward, if economic conditions gradually strengthen as expected, it is likely that monetary policy will need to be adjusted further over time to ensure that inflation remains consistent with the target over the medium term,” the RBA said on Friday.

It reiterated that there has been relatively little information available as to the economic impact of last year’s three rate increases.

The RBA expects the economy to grow at around 3.25 per cent and 3.50 per cent in 2010 and 2011, much stronger than 2009, with it forecast to have ended the year running at 2.0 per cent growth.

The December quarter national accounts will be released next month.

Treasurer Wayne Swan welcomed the central bank’s optimism, but warned there was still no room for complacency.

“It certainly points to the fact that the economy is recovering,” he told reporters in Sydney.

Mr Swan said the RBA statement pointed to the importance of stimulus in supporting jobs.

The RBA said it appeared the unemployment rate had peaked at 5.75 per cent, a full percentage below where Treasury had forecast for 2009/10 in the Mid-year Economic and Fiscal Outlook released just last November.

Mr Swan also took the opportunity to have a dig at the opposition’s economic policy, saying Opposition Leader Tony Abbott is pretending that he’ll be able to lower debt while lowering taxes.

“That’s just simply a magic pudding, it’s voodoo economics,” Mr Swan said.

But opposition treasury spokesman Joe Hockey struck back, saying the RBA’s strong growth predictions are a further sign that the government should wind back its unspent stimulus measures.

“They continue to spend as if we are in recession. There is a very clear message to the Rudd government from the Reserve Bank - stop spending so much money, (or) interest rates will rise,” Mr Hockey told reporters in Sydney.

The RBA now expects the policy sensitive measures of underlying inflation, while lower than now, will be 2.5 per cent at end 2010 and 2.75 per cent a year later - a quarter point higher than earlier forecast.

Having been caught completely off-guard by this week’s unchanged rate decision, pricing on wholesale interest rates suggests the next increase could be a few months away.

While some economists are predicting an increase at the March board meeting, the market sees a less than 20 per cent chance of a move at this stage and it is not until May that a rise is priced in with any conviction.

JP Morgan chief economist Stephen Walters expects the RBA will hold off until April.

“If board members this week were unsure how households would react to the rise in borrowing costs late last year, why would they be any the wiser in three and a half weeks time?” he said.

AAP