OFFICIAL interest rates could hit six per cent by the end of 2010, as Australia's economic story enters a new chapter of higher inflation.
TD Securities senior strategist Annette Beacher says the latest unemployment figures show the economy is speeding up with less spare capacity than previous economic upswings, potentially putting upwards pressure on inflation and therefore interest rates.
Ms Beacher says there is a risk the Reserve Bank of Australia will push the cash rate from its current expansionary setting, through the "neutral" range of 4.5 to 5.0 per cent, and into restrictive territory by the end of the year.
The cash rate is currently at 3.75 per cent.
"The economy has only just troughed and it's only going to take off from here. That's our view, the RBA's view and everyone's view," Ms Beacher said.
"We're heading into this upswing with scant spare capacity and the last time I checked, scant spare capacity meant inflationary pressures.
"As data like (the jobs report) starts flowing through, there is a higher probability of them lifting to six per cent cash rate than there is of four per cent."
Ms Beacher also foreshadowed potential 50 basis point (half a percentage point) rate rises rather than the recent increases of 25 basis points.
"It's not about finding neutral, its about restrictive policy," Ms Beacher said
The Australian Bureau of Statistics surprised market observers this week, releasing figures that showed the nation's unemployment rate had dropped to 5.5 per cent in December, from 5.6 per cent the month before.
At the same time, total employment hit an all-time high of 10.906 million.
An economist at financial markets research group 4Cast, Michael Turner, said low unemployment, or low capacity, at the start of an economic growth cycle could push inflation higher.
"As unemployment tends to go lower people tend to get more confident making higher wage claims," he said.
"So you get that kind of cost-push inflation on the supply side, and you also have demand-pull inflation because there's more people working more hours and making more money to buy more things which pushes up demand.
"The less unemployed there are, the more expensive workers become.
"After the employment numbers there are certainly concerns that we're going to see the RBA start to get worried about wage inflation."
The consumer price index rose 1.3 per cent in the year to September, below the RBA's target range of two to three per cent.
However, underlying inflation, which is regarded as a better measure of the strength of inflationary pressures, was well above the RBA's target band at 3.5 per cent.
In its November Statement on Monetary Policy, the RBA forecast annual headline inflation to be at 2.5 per cent from June 2010 to June 2012.
The central bank lifted the cash rate off a 49-year low of three per cent with a 25 basis point move October last year.
It matched that with two more in 25 basis point rises in November and December.
Many economists predict the RBA will lift the rate to four per cent in February.
The December quarter CPI is due on January 27.
