Tight labour markets in Australia, which are being underpinned by the resources boom, mean there is little prospect of interest rate relief across the Tasman over the next two years, says an economic forecaster.
But interest rates there may not be raised until just before the federal election.
According to BIS Shrapnel's Economic Outlook bulletin, the benign March quarter Consumer Price Index result is expected to give the Australian economy a temporary interest rate reprieve but tight labour markets mean inflationary pressures have not gone away.
Bulletin author and senior economist Richard Robinson said high levels of mining, business and public sector investment were underpinning strong demand for labour.
"Whether or not interest rates rise in the next couple of months, the fact is that the presence of capacity constraints, particularly for labour, means the economy has an inflationary bias and the Reserve Bank of Australia (RBA) will maintain a tightening bias until these constraints ease," he said.
"Strong demand for labour and skilled labour shortages - as evidenced by high job vacancies - are fuelling wage pressures as employers bid up wages to attract and retain good workers."
BIS forecast overall investment will remain strong over 2007 and into 2008, before easing.
Mr Robinson said if interest rates were raised in June or later this year, consumer demand would be dented and the housing recovery "nipped in the bud".
However, BIS said higher interest rates would have little effect on booming resources investment, which would continue to be driven by high commodity prices and a strong world economy, particularly from China.
BIS said it expected the RBA to raise official interest rates by 25 basis points this year, given the strong underlying momentum in the economy.
"The RBA will raise rates for maximum effect," Mr Robinson said.
"It needs to change psychology in the household and business communities.
"Given the Reserve Bank governor's (Glenn Stevens) recent comments to the Senate committee, don't be surprised if rates are raised as late as September (just before the election is likely to be called)."
