OECD says rate rise for Australians

A global economic research body has warned Australians that interest rates will rise by up to 1.2 percent in the coming year.In its global economic outlook, the Organisation for Economic Cooperation and Development (OECD) said that while there are risks to the Australian economy from the current crisis gripping European markets, the Reserve Bank will push interest rates up.The OECD says official interest rates wil rise from their current 4.5 percent to 5.7 percent by June 2011.That would likely push real mortgage interest rates towards 9 percent.However, Australian economists are calling for the RBA to pause after its raising rates six times since October last year.The OECD has warned that there are negative risks to Australia's rosy economic outlook from the uneven pace of the global recovery and volatility in financial markets.It says there are substantive risks related to sovereign debt markets which, while originating in some euro-area economies, has spread to other euro members and other parts of the world."Overheating in emerging market economies also poses a risk," it says."A boom-bust scenario cannot be ruled out, requiring a much stronger tightening of monetary policy in some non-OECD countries, including China and India."For Australia, it also says rising confidence and more favourable international trade conditions may lead to more buoyant demand that needs a more rapid rise in interest rates.These risks aside, the OECD expects the Reserve Bank of Australia (RBA) will in any case have to add to its six rate rises so far."After weathering the crisis well in 2009, the Australian economy is projected to experience strong growth in 2010 and 2011, above its trend rate," the OECD says.It is forecasting economic growth of 3.2 per cent in 2010, accelerating to 3.6 per cent in 2011, after 1.4 per cent growth in 2009.This growth will be driven by booming exports and domestic demand.It expects the unemployment rate - currently at 5.4 per cent - to fall below five per cent by the end of 2011, while inflation will be moderate.This, it says, will keep confidence among households at high levels, although the pace of decline in the jobless rate will slow as working hours expand.It expects the consumer price index to hit the top of the RBA's two to three per cent target band in 2010, before easing to 2.7 per cent in 2011.The Paris-based institution says for Australia, managing the exit strategy from the global crisis is "less problematic" than in most OECD countries, and the tightening of both monetary and fiscal policy is welcome given the rebound in activity.It says rising private demand, fuelled by investments and stockbuilding by companies, is expected to replace public demand as the main force driving the recovery in 2010 and 2011."Companies in the mining sector should benefit in particular from the dynamism force of Asian markets and the significant pick-up in the terms of trade," it says."These developments, coupled with the rise in real estate investments, are likely to improve the employment situation."Responding to the report, Treasurer Wayne Swan said it highlighted how Australia's economic growth and employment outlook were among the best in the OECD."The OECD report is a reminder of the strong economic management that has seen Australia fight off global recession and which is returning the budget to surplus three years early and halving peak debt," he said in a statement.Mr Swan also welcomed the OECD's observation that mining companies would benefit from Asian demand and an improvement in Australia's terms of trade.But he pointed out the underlying weakness in Europe was a threat to global recovery.