(domain.com.au)Modest interest rate cuts are likely from late 2007 with inflation pressures subsiding by the middle of the year, the OECD said in its latest economic outlook for Australia.

However, the Organisation for Economic Co-operation and Development expects economic growth will remain below trend until 2008, held back in 2007 by the effect of the drought on the agricultural sector.

“Interest rates are close to a level that should ensure inflation returns to the target over the coming year. Modest interest rate cuts from late 2007 should not jeopardise inflation stabilising around the mid-point of the target,” the OECD said.

The Reserve Bank of Australia raised interest rates for a third time this year earlier this month to 6.25 per cent after the consumer price index remained above its 2-3 per cent target due to the impact of higher fuel prices, and rising fresh fruit prices in the wake of Cyclone Larry.

Labour market tightness with the unemployment rate at a 30-year low has also led to a pick-up in wage inflation, although not yet to a level which threatens the inflation target, the OECD said.

The unemployment rate was 4.6 per cent in October….more

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