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Forecaster says crisis over, but recovery wil -

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ELEANOR HALL: Australia might have avoided the worst of the global economic downturn, but today the
economic forecaster Access Economics is warning that the recovery is unlikely to be robust.

Economists though are rapidly revising their outlooks for interest rates, with some predicting that
the official cash rate could rise to 4 per cent by the end of this year, as business editor Peter
Ryan reports.

PETER RYAN: This time last year, Chris Richardson was like most other economists in predicting
massive government stimulus, rising unemployment and plunging interest rates as the global
financial crisis unfolded. Now the view that Australia has escaped the worst case scenario has
Chris Richardson breathing a qualified sigh of relief.

CHRIS RICHARDSON: Recovery is starting in Australia. It is starting around the world and that is
magnificent news. Equally, it does come at a cost.

PETER RYAN: In the latest Business Outlook from Access Economics, Chris Richardson warns the
headwinds of recovery will be difficult to navigate. He says unemployment, currently 5.7 per cent,
is yet to peak at 6.8 per cent and that the price of better times will be higher interest rates.

CHRIS RICHARDSON: The better things get, the more that interest rates need to rise. They dropped to
emergency lows when things were at their worst. They keep rising from here. Well, normally they are
about two percentage points higher than they are today. Chances are, we will get back there the
first half of 2011.

PETER RYAN: What is going to happen to rates do you think then in the next 12 months?

CHRIS RICHARDSON: That means fairly steady rate rises from now. Not too much all at once and the
Reserve Bank knows that we sail through this crisis on the back of stimulus. It won't raise rates
too fast but it will raise them steadily from here.

PETER RYAN: Chris Richardson says the trillions of dollars of economic stimulus paid by governments
around the world over the past year has boosted economic activity rather than just putting a floor
under it. But when the stimulus is gradually rolled back, he says it won't be pleasant.

CHRIS RICHARDSON: The average Australian family has sailed through this on the back of a temporary
10 per cent pay rise from governments or the cash splash and from interest rate cuts. Now the cash
splash has gone. The interest rate cuts are being unwound. This will hurt more than most people
realise.

PETER RYAN: The pace of the recovery and the Reserve Bank's swift action in declaring the emergency
over has surprised most interest rate watchers, including Westpac's chief economist Bill Evans.
He's now expecting the RBA to move aggressively in November with a 50 basis point hike on Melbourne
Cup Day.

BILL EVANS: Well, I think that the Reserve Bank will certainly raise rates in both November and
December. I think the urgency that we read into the speech that the Reserve Bank governor gave last
week and the fact that interest rates are so low at the moment indicates that they will be active
in both months and there is a reasonable chance that the movement in November might be as much as
half a per cent rather than the standard quarter of a per cent.

PETER RYAN: Do you think that the Reserve Bank board is taking the view that rates need to rise and
it is better to push them up earlier rather than taking a more gradual approach?

BILL EVANS: Well, I think they have taken the approach that says that the 125 basis points that
were done earlier on this year in terms of cutting rates were in a very different environment of
the economic outlook to where we are today and so it makes some sense to redress that relatively
quickly.

PETER RYAN: Do you think that the Reserve Bank also wants to make the point that it is a good thing
that the economy is in better shape and to send the message to the general public that when the
economy is in good shape, that is when rates need to go up?

BILL EVANS: Yes, I think the fact that rates go up is indicating that the economy is in good shape
but the important point is that they are at such low levels now that rates rising isn't pushing
rates into a level that would constrain the economy. We are a long way from that.

PETER RYAN: When the Reserve Bank governor talks about normalising rates, what figure do you think
that he has in mind for the cash rate?

BILL EVANS: Well, I don't think he really knows. I think he knows that it is above current levels.
Our view is that once rates reach 4.5 per cent, the cash rate, next year which we think will
probably be sometime in the second quarter of next year, then the Reserve Bank will go for a
substantially extended pause.

PETER RYAN: Economists are now waiting on tomorrow's release of the minutes from the last meeting
of the Reserve Bank board for any sign of how aggressive future rate rises will be.

ELEANOR HALL: That is business editor, Peter Ryan.