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Soothsayers face off on near economic future

The latest research from BIS Shrapnel certainly has the town talking as they predict a fairly torrid time for Australia.

Their forecasts are for interest rates to rise more than 2 percent over the next two years to take the home loan rates to 9%.

Much of this rise is attributed to increased inflation as a result of the GST. BIS Shrapnel envisage a rise in inflation of almost 3%.

This conflicts quite markedly with the Government forecasts of 1.9% being added to the CPI figures.

At the same time as this forecast was released, Access Economics presented a slightly different view.

While they, like BIS Shrapnel, saw the possibility of rates rising, they forecast a slower rise in rates.

In addition to the GST induced rise in rates, there was also the possibility of a rise due to the extra spending that would occur at the time of the Sydney Olympics.

This could fuel the spending spiral causing a more severe inflation hike.

Both these forecasts, essentially, are similar. The Access Economics view is the one I would favour.

It is accepted that there will be a rise in inflation of around 2% as a result of the GST. Based on international experience, this will be a one-off rise with little long-term effect.

This, combined with the extreme caution and diligence being displayed by the Reserve Bank Governor, should maintain a fairly tight rein on inflation. Therefore, it is hard to see much pressure being exerted on interest rates.

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