High rates here to stay

According to a BIS Shrapnel report released today, high interest rates could be here to stay. BIS Shrapnel have also warned that the Reserve Bank will struggle to control inflation over the next decade because of skilled worker shortages and higher food and fuel prices.

New economic data also shows another record trade deficit and further signs of slowing demand, with most economists and investors now tipping that rates will remain on hold for the time being, and possible rate cuts over the next year.

But the BIS Shrapnel report says despite growth slowing initially, inflation will remain above 3% for the next three years, and stay at about 3% for the next decade – meaning the Reserve Bank will be forced to increase interest rates.

The report says cheap Chinese imports and scarcity of goods will keep food and fuel prices high for the next decade. The Australian dollar will fall as commodity prices ease over the next few years, which will be positive for exporters but bad for inflation.

Business investment growth will also wind back, and construction will instead start to pick up, preventing inflation from dwindling.

Read the full article from The Age, Business Day, 8 April, 2008.

The last few posts have discussed Australia’s current economic climate and provided views from various commentators. What’s your view? What do you predict will happen to interest rates, consumer demand and fuel prices?



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