Tax cuts may trigger interest-rate pain

TAX cuts in July pay packets could lead to another interest rate rise in the September quarter, despite poor job figures released last week.

Tax cuts may trigger rate pain

TAX cuts in July pay packets could lead to another interest rate rise in the September quarter, despite poor job figures released last week.

Economic forecaster BIS Shrapnel is tipping a rise in August or September, despite analysts saying last week that the loss of 20,000 jobs last month made a rise unlikely.

The report's release came as Finance Minister Lindsay Tanner declared Australia was still "a long way from a recession" despite consumer sentiment plunging to its lowest level in more than 15 years amid spiralling food and fuel costs.

Mr Tanner said while there was no question some people were going through tough times, the threat of recession was not great.

"We are a long, long way from recession," he said.

Global inflation threat

His comments follow a more grim prognosis from a meeting of finance ministers from the Group of 8 industrialised nations, which said in a statement at the weekend that troubling times awaited the global economy.

The ministers said increasing commodity prices - especially for oil and food - posed a serious threat to stable growth worldwide.

However Mr Tanner said Australia's strong economy bucked the international trend.

"Recessions are things you talk about for national economies," he said. "When individual households are doing it tough that's a different phenomenon."

However Mr Tanner said inflation remained a big threat.

More rate pain

And BIS Shrapnel senior project manager Angie Zigomanis said the Reserve Bank would likely move in coming months to ensure taxpayers were not tempted to spend their Budget windfall when the tax cuts kicked in from July 1.

He said another interest rate rise would result in residential price growth stagnating and rents soaring over the coming financial year, with the cost of renting set to rise by much more than the cost of buying in the next two years because of an undersupply in new housing.

However it's not all doom and gloom with predictions that rising rents and improving credit conditions will be the key to the next upturn in prices in most capital cities.

House prices to grow

Mr Zigomanis said as credit conditions recovered next year, he expected banks to pass on lower borrowing rates to customers.

"This will enable house price growth to pick up in many centres during 2009/10 and 2010/11," Mr Zigomanis said.

His report predicts Brisbane, the Gold Coast, the Sunshine Coast and Darwin will show the strongest price growth through to 2011 because of significant pent-up demand in these markets and strong employment and wages growth.

He said while the median house price in Brisbane would reach $422,000 this month, over the three years to 2011, the median house price should rise by a total of 22 per cent, which in real terms would be 11 per cent (adjusted for inflation).