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Era of low interest rates over: BIS Shrapnel -

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Era of low interest rates over: BIS Shrapnel

The World Today - Tuesday, 8 April , 2008 12:50:00

Reporter: Peter Ryan

ASHLEY HALL: To the economy now and there's a gloomy forecast for anyone who has a home mortgage or
is hoping to get one. A leading forecaster warns the recent era of low interest rates is over and
there's little prospect that historically cheap housing loans will return in the near future.

BIS Shrapnel says despite signs that the Reserve Bank's rates hiking strategy is working, the
inflation genie will stay out of the bottle for several years to come.

The firm's senior economist and chief forecaster, Richard Robinson, has been speaking with our
business editor, Peter Ryan.

PETER RYAN: Richard Robinson, are the days of low interest rates over?

RICHARD ROBINSON: Yeah, they probably are. I don't think we'll get back to the interest rates we
had earlier this decade actually.

PETER RYAN: The official rate went as low as 4.25 per cent in December 2001. What would it take now
to make that possible again?

RICHARD ROBINSON: Probably a recession to get back to those sort of levels. Those sort of levels
were in response to world downturn and also a downturn here which was cause probably by too much
exuberance in the late '90s and running into the Olympics and then followed by the GST.

So, after that we had a downturn and they pushed rates right down. They're not likely to go back to
those levels.

PETER RYAN: It's probably understandable that there can be some short memories when it comes to
what we had in 2001.

RICHARD ROBINSON: Yeah, I think so. The Reserve Bank doesn't want to drive us into recession or
into a downturn, but they are trying to slow the spending in the economy.

The way I think the Reserve Bank is looking at it though, will take housing as a collateral damage.
So, the outlook for growth is strong. The problem is, we're on a tight capacity and inflation is
going to remain close to that three per cent or even above that three per cent level.

It's hard to see it going back towards, you know, the two per cent we had earlier this decade. So,
the Reserve Bank is going to remain on the inflation watch, and unfortunately what that means is
that there's not a lot of scope to cut interest rates.

The only way they can cut interest rates is really when employment or the unemployment rate goes
over five per cent, and that's not likely for at least another year.

PETER RYAN: So, you're not expecting any immediate or in the short-term blowout in unemployment
that would provide the impetus for a rates cut?

RICHARD ROBINSON: No, this investment boom has still got too much momentum. There's still a hell of
a lot of work in the pipeline, just in resources engineering, construction, and even some of the
non-residential building.

So, that's ... you know, there's enough work just to sustain that for another year, even if things
tail away.

So, that will sustain the employment growth. China is likely to offset the weakness of the United
States and that will still continue to pump a lot of money into our economy.

PETER RYAN: Even if as the Reserve Bank predicts inflation does fall back to three per cent in June
2010, could we expect the Reserve Bank to dramatically cut rates then?

RICHARD ROBINSON: It does give them a bit of scope to cut rates. I wouldn't say dramatically cut
rates. I wouldn't expect rates to come back very far. So what that really means is the housing rate
is probably going to remain over nine per cent for the foreseeable future.

It may go below nine per cent, but that's going to be accompanied by some sort of rise in
unemployment.

PETER RYAN: But nothing until June 2010.

RICHARD ROBINSON: It may occur earlier, but certainly it's not going to happen within the next, you
know, year or 18 months. Late 2009, early 2010 is probably about the earliest you're going to get a
rate cut.

PETER RYAN: And is there a risk of Australia having a major downturn at this point? Given that the
economy is very strong and unemployment at a 33-year low?

RICHARD ROBINSON: I rate it as a fairly low probability, but if things slow down quickly and things
get out of hand, yes, the Reserve Bank may be faced with a dramatic downturn.

But it's that housing investment that's waiting in the wings, which will take over from business
investment if that dramatically slows. And that's the thing that will keep us afloat.

That's why I don't think there's going to be a major downturn. We've got a lot of pent-up demand
for housing. If we have a downturn and rates come down, then housing will take off, and that will
keep the economy running strongly for at least the next five years.

ASHLEY HALL: BIS Shrapnel's chief forecaster, Richard Robinson, speaking with our business editor,
Peter Ryan.