oecd predicts australian rates cut...

Source: www.news.com.au/business

OECD predicts Australian rates cut
By Colin Brinsden
November 28, 2006 09:27pm

MODEST interest rate cuts are likely from late next year, with inflation pressures subsiding by the middle of 2007, the Organisation for Economic Co-operation and Development (OECD) says in its latest economic outlook for Australia.

However, it expects economic growth will remain below trend until 2008, held back in 2007 by the effect of the drought on the agricultural sector.

"Interest rates are close to a level that should ensure inflation returns to the target over the coming year. Modest interest rate cuts from late 2007 should not jeopardise inflation stabilising around the mid-point of the target," the OECD says.

The Reserve Bank of Australia raised interest rates earlier this month for the third time this year, after the consumer price index remained above its target of 2-3 per cent, due to the impact of higher fuel prices and rising fresh fruit prices in the wake of Cyclone Larry.

Labour market tightness, with the unemployment rate at a 30-year low, has also led to a pick-up in wage inflation, although not yet to a level which threatens the inflation target, the OECD says.

The unemployment rate was 4.6 per cent in October.

The OECD says a substantial improvement in Australia's trade balance in recent months suggests a long-awaited pick-up in resource export volumes – which may have been constrained by inadequate infrastructure – is beginning to materialise.

"However, drought conditions are likely to hold back agricultural exports in 2007 and restrain growth," it says.

Gross domestic product (GDP) growth was just over two per cent in the year to mid-2006, well below trend growth of over three per cent, the OECD says.

Higher petrol prices and interest rates have dampened consumption, while a four-year business investment boom has slowed markedly.

"A recovery in the agricultural sector, assuming a return to more normal rain patterns, should lead to a pick-up in growth in 2008 to above 3.5 per cent, with the economy operating close to capacity.

"A prolongation of the current drought would endanger the pick-up in growth in 2008."

The OECD says the Government should maintain a modest fiscal surplus because buoyant tax receipts related to the commodities boom "will be transitory".

Substantial income tax cuts in the May Budget, as well as plans for increased spending on infrastructure by the states, are likely to see the surplus roughly halve as a share of GDP over the next two years.