Interest rates tipped for a substantial rise

18 October 2004

Interest rates are likely to rise substantially in the next three years while the economy heads for a downturn, the economic forecaster BIS Shrapnel has warned.

BIS Shrapnel made the forecast in its latest Long-Term Forecasts 2004 to 2019. The report said it was a myth to think that Australia's moderate growth, low inflation and low interest rates could continue forever.

Its senior economist, Matthew Hassan, said the Reserve Bank would have to increase rates between two and three percentage points in the next three years.

The expected low unemployment levels next financial year would create a skilled workers shortage, which would mean many businesses were likely to pay higher wages, he said. Higher wages would cause price rises in 2006.

"These two years of inflationary growth will be the trigger for substantial interest rate rises, with the official cash rate expected to peak at around 8 per cent in late 2006," Mr Hassan said.

BIS Shrapnel still predicts a recession in 2007-08. Its report said a business investment bust in 2007 would follow the current rush to invest to meet demand.