Interest rates and inflation coming, CommSec warns

Businesses warned to prepare for inflation and interest rate rises as economy improves

By Brad Gardner

Businesses are being warned to prepare for inflation and interest rate rises as the economy shakes off the effects of the global economic downturn.

Stockbroking firm CommSec is predicting rates to rise to 4 percent by the end of the next year, claiming a recent surge in the market and new jobs data is putting pressure on the Reserve Bank to act.

Although the Bank recently chose to leave rates unchanged, CommSec market analyst Juliette Saly says 11 straight gains on the market and a rise in part-time workers means the current rate of 3 percent cannot be maintained.

Saly predicts interest rates of more than 5 percent within two years because "inflation is going to become the enemy".

"Every piece of economic data shows we are on the way up," she says.

"We are going to start to see inflation, unfortunately, rear its ugly head."

In its statement on monetary policy released last week, the Reserve Bank said the global economy was stabilising after contracting in the December and March quarters.

The data prompted the Reserve Bank to revise up its forecasts for world growth for the first time in a year, with the statement also highlighting growth in international trade and global industrial production.

Although some businesses continue to be buffeted by the financial fallout, Saly says some of the hardest hit areas such as manufacturing are showing signs of recovery.

Saly made the comments at this year’s NatRoad conference in NSW, which also featured Westpac business advisor Rob Lockhart.

Lockhart urged companies to start implementing plans now to make sure they were ready to take advantage of an improving economy.

"Now’s the time to get your business up to speed," he says.

He added that businesses must also focus on growth to ensure cash flows do not dry up as demand increases for services.

During his speech to conference attendees, Lockhart told them growth will chew up a bottom line to the point where those unprepared will suffer.

"If you are going to grow your business, monitor it," he says.

"You need to know where that cash is coming from."

CommSec has also used the recent job figures to predict unemployment will not rise to 8.5 percent as forecast by the Rudd Government.

According to the Australian Bureau of Statistics, unemployment increased to 5.8 percent to 664,100 in July.

The figures show full-time employment fell to 7.6 million, while part-time employment increased by 48,200 to 3.2 million.

Saly says the "impressive jobs data" indicates jobs are more secure and predicts the unemployment rate to peak at 6.5 percent.

"We are not seeing the massive job shedding that was predicted," she says.

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