Interest rate pain set to return in 2010

By Stephen Johnson, AAP, 21 July 2009

THE days of historically low interest rates could soon be over as a rebound in the economy restrains the Reserve Bank's use of the monetary scalpel.

With interest rates at a 49-year low, and middle-income earners benefiting from recent federal government stimulus programs, inflation may return to the headlines during the coming year.

An Access Economics business outlook report says interest rates will be raised again in 2010 and 2011.

Access Economics director Chris Richardson said that while the Reserve Bank may cut interest rates one more time to help banks cope with borrowing costs, a less dire than expected set of unemployment numbers next year may herald the start of a recovery.

The Government expects unemployment to peak at 8.5 per cent during the next financial year.

Mr Richardson, however, said the jobless rate could hit a ceiling of 7.5 per cent in 2010, up from 5.8 per cent at present.

Government hits back at estimates

Despite this estimate, Treasurer Wayne Swan said this morning that the Federal Government will not revise its unemployment forecast.

"The Government will not be revising the forecast until ... MYEFO," Mr Swan told ABC Radio today, referring to the Mid-Year Economic and Fiscal Outlook, due out at the end of the year.

Mr Swan said investment in infrastructure would help boost the economy, and ruled out a third wave of cash payments being called for by trade unions.

More cuts to come before the pain: Access Economics

Mr Richardson said he expected the RBA to make one more cut before Christmas.

"They (interest rates) are as low as they have been for some time and can't stay there," he said.

The Reserve Bank left the cash rate on hold at three per cent in July.

In announcing the decision, central bank governor Glenn Stevens pointed to a stabilising global economy and strengthening growth in China.

Access Economics said a rebound in Australia's second biggest trading partner China, a major buyer of bulk commodities, could spare the commodities states of Queensland and Western Australia from the worst aspects of the global crisis.

"If China's recovery stabilises into something sustainable, WA has a bad 2009/10 instead of an ugly one,'' the outlook report said.

Inflationary pressures, which usually govern the direction of interest rates, are showing further signs of easing.

Producer prices, or the costs of making goods and services, declined by 0.8 per cent in the June quarter, Australian Bureau of Statistics figures released yesterday showed.

This was the biggest quarterly fall since the data series began in 1998.

The Australian dollar rose above 80 US cents in June for the first time in eight months, helping to reduce imported production costs.

Economists are also expecting consumer price index data for the June quarter, due out tomorrow, to show signs of easing.

Mr Richardson said inflationary pressures were easing, as they always do in a downturn, but global stimulus measures would eventually put pressure on prices.

"The risk is that a world awash in money sees inflation in the recovery,'' the business outlook report said.