通膨保持高位，对贷款利息不利。

David Uren, Economics correspondent | December 22, 2007

INFLATION will rocket to 4 per cent by March, making further rate hikes a near certainty in the new year.

Internal forecasts obtained by The Weekend Australian reveal Treasury expects inflation to remain above 3 per cent - the top of the Reserve Bank of Australia's target band - throughout next year.

The alarming outlook suggests home buyers could face mortgage rates of close to 9 per cent early in the new year.

Interest rates have risen 11 times since 2001, lifting standard variable mortgage rates from 6.05 per cent to 8.55per cent in the last six years of the Howard government.

Former treasurer Peter Costello almost certainly knew during the election campaign that inflation was heading above 3 per cent, although he relied on year-average figures published by Treasury to assert that price rises would remain below the Reserve Bank's ceiling.

However, Treasury has recalculated its internal forecasts since the November 24 election, using the latest official inflation figures for the September quarter and the latest national accounts.

And the new figures show the outlook has become much worse.

The forecasts were presented in the past fortnight to a meeting of the Joint Economic Forecasting Group, which combines representatives from the Prime Minister's Department, the Reserve Bank, the Finance Department and the Australian Bureau of Statistics. It is chaired by Treasury.

The new forecasts explain the level of concern expressed by new Treasurer Wayne Swan about rising inflation in his speech to the Australian Industry Group last week.

"I warn you we face an extended period of elevated inflation," he said.

Mr Swan refused to comment on the forecasts yesterday, but his speech last week revealed he had been advised by Treasury officials that the underlying rate of inflation would come under pressure over the next 18 months.

The peak of inflation in March next year is 0.5 percentage points higher than Treasury expected at the time it was preparing its mid-year budget update on the eve of the election campaign.

The year-average inflation forecast, which will be published in next year's federal budget, has been raised from 2.75 per cent to 3 per cent for both this financial year and 2008-09.

Treasury is now even more pessimistic about the inflationary outlook over the coming year than the Reserve Bank. The Reserve Bank expects that by June next year the important figure of underlying inflation will be 3.25 per cent. Treasury believes it will be 3.5 per cent.

This would be the highest level of underlying inflation in the past 10 years. This measure of inflation excludes the biggest price moves, such as that of fruit and petrol, and guides the bank's interest rate decisions.

The Reserve Bank appears to have greater confidence than Treasury that its interest rate increases, including one in the middle of the election campaign last month, will start to have an effect on the level of consumer spending and other inflationary demand.

The Reserve Bank also expects continuing high levels of investment to ease some of the constraint on the capacity of business to meet the level of demand.

However, the Reserve Bank has made it clear it believes further interest rate rises may be required, deciding against a rise at its board meeting this month only because the world financial turmoil was already pushing up interest costs to business.

Financial markets still think the Reserve Bank can hold off lifting rates a bit longer, placing a 42 per cent probability on it raising the official cash rate from 6.75 per cent to 7 per cent at the next board meeting in February.

That would be its highest level since 1996. The banks are expected to pass on at least some of their increase in funding costs - caused by the global credit market fallout of the sub-prime mortgage crisis in the US - to their variable rate home-loan customers in the next six to eight weeks.

Most analysts are forecasting a 0.15 per cent increase in mortgage rates. A further 0.25 percentage point increase in the Reserve Bank's official rate, on top of the unofficial rise by the banks, would push a standard home loan to 8.95 per cent.

The spike in the headline inflation rate in March is due to sharply rising food and petrol prices.

Mr Swan has signalled that Labor will tackle inflation by seeking savings from public sector spending in the 2008-09 budget and with a broader, long-term plan to boost investments in the economy's productive capacity.

However, he has acknowledged that in the short term, the Government will be relying on the Reserve Bank to control the build-up in inflationary pressure.