Australia’s economic growth is set to accelerate, resulting in the re-emergence of serious inflationary pressures and high interest rates, BIS Shrapnel has warned.
According to the researcher’s Long Term Forecasts report for 2010-2025 released today, tightening labour markets and accelerated household spending will lead to higher consumer price inflation, forcing the official cash rate up towards 6.5 per cent and home loan rates in excess of 9 per cent within three to four years.
Despite the uncertain outcome in the weekend’s federal election, BIS Shrapnel said whichever party was elected would face a number of critical issues including a serious housing shortage and ongoing infrastructure deficiencies.
“The real policy issues for the economy were either given only cursory consideration or put into the too hard basket,” BIS Shrapnel senior economist Richard Robinson commented on the election debate.
Mr Robinson said weaker population growth would take some of the pressure off housing but the current undersupply was unlikely to be adequately addressed through the current cycle, given that mortgage rents were already around neutral levels.
“The combination of significant pent up demand, strong rents and yields, rising incomes and an easing in funding for property developers is expected to sustain a recovery in activity over the next two years,” he said.
However, that upswing would not last, he warned, with minimal slack in labour markets, a recovery in consumer spending and, subsequently, business investment, to see the re-emergence of capacity constraints from 2011/12.
“Labour shortages and a synchronisation of construction cycles will lead to a build-up in inflationary pressures over 2011/12 and 2012/13,” Mr Robinson said.
“The RBA will be forced to respond by raising interest rates to a maximum of 6.5 per cent, which will take mortgage rates back over nine per cent and send housing activity into a controlled downturn over 2013/14.”
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