By Robert Carry

The Reserve Bank of Australia (RBA) should avoid rushing to normalise interest rates as the worst of the economic downturn may be yet to register, CommSec Ltd has said.

In its latest inflation report, CommSec said the Australian economy should pick up pace over the coming year, justifying a gradual lift in interest rates back to more normal levels.

However, a statement from the group continued, "The Reserve Bank shouldn't be in a rush to 'normalise' rates. The full effects of the slowdown haven't shown up in the inflation figures and the higher Aussie dollar will also be keeping a lid on inflation. In addition, there are good reasons to be cautious about the trajectory of the global economy - especially the US."

CommSec also pointed out that the level of influence the RBA could have on the economy was quite limited. The statement continued, "As much as it would like to, the Reserve Bank doesn't have total control over inflation. The RBA can lift interest rates to slow the economy and therefore affect the price-setting behaviour of retailers. But structural factors like the extent of competition in certain industries, government charges, housing shortages and volatile items like food and petrol prices are outside central bank control."

The main drivers of inflation in the past quarter were all outside Reserve Bank control. The RBA could jack up rates markedly but it still wouldn't affect electricity or water rates or even petrol prices. All the Reserve Bank can do is to keep the economy growing at a sustainable rate, keeping downward pressure on inflation elsewhere in the economy.

CommSec predicted that the Reserve Bank will lift rates by a quarter of a percent at both the November and December rate-setting meetings. CommSec's report also found that the Consumer Price Index (CPI) - rose by 1% in the September quarter. The annual rate of inflation now stands at a decade low of 1.3%. Inflation remains well below the Reserve Bank's 2-3% target band.