The recession we may have to have

The days of low interest rates are over for Australia, meaning the Government and the Reserve Bank (RBA) will struggle to contain inflation, according to economic forecaster BIS Shrapnel.

In an analysis released today, BIS Shrapnel has forecast inflation will remain above 3 per cent for the rest of 2008, through 2009 and into 2008 and that while the RBA’s tightening of the cash rate should be sufficient to bring it back to 3 per cent by 2010, the days of low interest rates are over.

BIS Shrapnel senior economist and chief forecaster Richard Robinson said monetary policy was being employed in an environment of strong demand, capacity constraints and labour shortages and the strength of employment and the boost from successive income tax cuts was making the bank’s job harder.

“Demand won’t fall away, but given the indebtedness of the household sector, it is inevitable that we will see consumer spending slow,” Robinson said.

He said the impact of RBA policies on the business sector was slightly different with the mining and infrastructure booms largely immune to interest rate rises.

Robinson concluded his analysis by noting that Australia was nearing the top of the current interest rate tightening cycle, but it was only a localised peak.

“The stubbornness of inflation due to labour constraints means that we are unlikely to see a return to a low interest rate environment in the absence of the recession,” he said.