"Any evidence over the next three to six months that the Bank's required slowdown is not happening will soon lead to a very sharp change in the current soothing rhetoric and another rate hike will ensue," said Julene Lee of Westpac.

The RBA also hiked its 2008 inflation forecast to 4% from 3.5% and cut its GDP forecast to 2.25% from 3.25%. Inflation is expected to continue well into the next two years amidst tight credit conditions and slowing global demand.

"The market is likely to maintain partial pricing for another interest rate increase over the next few months, we look for rate cut momentum to build later in the years as activity weakens and as inflation threat eases," said TD Waterhouse Securities analyst Joshua Williams.

With current inflationary pressures bearing down on an overheating Australian economy, economists think that while an interest rate hike may not be imminent, it may not unavoidable in the future. The country's CPI has increased 1.3% in the first quarter and by 4.2% over the last year.

The Reserve Bank of Australia has been tightening interest rates for several months in an effort to battle rising inflation pressures in the country.

The report also noted that the Australian economy has grown over an extended period, which has resulted in surplus productive capacity. Australian GDP grew significantly during 2007 at 3.9% while domestic demand grew at an accelerated rate of 5.7%. This has resulted in a tight labour market and limited available capacity, which in turn prompted strong inflationary pressures.

Looking ahead, the newly elected Labour government will be unveiling its new budget on May 13. It has already set out A$31 billion of tax cuts to be spread out over the next four years. According to ANZ Economics, "This adds to the requirement for the budget to include measures which will offset the stimulus which the tax cuts and other election promises will provide to domestic spending, if it is to fulfill the Treasurer's oft-repeated promise that it will exert maximum downward pressure on inflation and interest rates."

By Steve Stecyk This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it