Australia's central bank says interest rates may need to be raised further to curb inflation

The Reserve Bank of Australia said Monday its key interest rates are likely to be raised further to restrain inflation and surging domestic demand growth.

Last Tuesday the bank lifted its key rate 25 basis points to 7 percent, bringing the cash rate to its highest level since 1996. It was the eleventh hike since mid-2002.

"The risk of inflation remaining uncomfortably high for some time is considerable," the RBA said in its February statement on monetary policy. "Absent a further shift in economic risks to the downside ... monetary policy is likely to need to be tighter in the period ahead."

The outlook leaves the door open for a further rise in interest rates at the central bank's next meeting on March 4, and implies there is a risk of multiple hikes in 2008 if the RBA is to keep inflation in its 2-3 percent target band.

The central bank's policy outlook is now in stark contrast with that of most other major central banks, with analysts expecting the European Central Bank to cut rates soon, following the lead of the United States, Canada and the U.K.

The RBA raised its forecasts for core inflation to 3.75 percent by mid-2008, up from a forecast of 3.25 percent issued in November 2007. Core inflation is still expected to be at the top of the RBA's band in 2010. It was running at 3.6 percent in the fourth quarter of 2007, its fastest pace in 16 years.

John Edwards, chief economist for HSBC in Australia, said there is a risk that the RBA could hike rates another three times. The slowing in domestic demand sought by the central bank is not yet apparent, Edwards said.

"We had thought 7 percent would be the top and clearly it's not going to be," he said.