Deloitte Access Economics says rates will have to rise as mining boom keeps wages and Aussie dollar high

Rates will remain on hold in the near-term but lift three times over the next 12 months, as the mining boom filters through the economy and holds up the Aussie dollar and labour rates, Deloitte Access Economics says.

The accounting giant says times are tough for many families and businesses, with families saving rather than spending, the stimulus running out, the housing sector petering out, and tourism, manufacturing and international student numbers under pressure as the resources sector pushes up the Australian dollar.

The resources boom is also making it harder for other sectors of the economy to keep its pay levels attractive, Deloitte Access Economics says in its June quarter business outlook, noting that a person can earn more than a GP by flipping burgers in boom-time Karratha.

The report says the “two speed economy pressures on the industrial landscape are intensifying” and “many families are doing it tough and the likes of the retailers would hurt like hell if rates rose further.”

“Add in the huge costs of floods and cyclones, and no wonder people are shaking their heads at hints that the Reserve Bank may raise rates further,” the report says.

The central bank has had rates on hold at 4.75% since November last year, and the market is awaiting inflation data this week, with expectations of a 0.7% rise for the June quarter, taking the annual rate to 2.5%. It has recently softened its bullishness on the Australian economy.

But Deloitte Access Economics expects the Australian economy to grow by 1.9% in the year to June 30, and 3.5% in the year ahead, with global growth coming in above trend through the FY2011 and above-trend global growth in FY2011 and FY2012.

The report points out that flood and cyclone costs were a one-off, and production is already rebounding from those losses.

And while Deloitte Access Economics expects no immediate end to the two-speed economy, it argues that sectors hit hard by the strong Australian dollar and labour market will be indirect beneficiaries of the strength in Australia’s national income.

“The downswing in underlying inflation has been large, but it’s done its dash. Poor productivity gains have left the cost of workers rising at the fastest rate for two decades, while growing demand will allow more businesses to pass on price rises,” the report says.

“Although that won’t be true in retail – where online alternatives are sharpening already fierce competitive pressures – the overall picture points to rising inflation, topped up by further gains in housing rents and electricity cost.”