The Reserve Bank has lifted its growth forecasts for the Australian economy and made it clear that interest rates will rise as the economy resumes its expansion.

The warning is hardly ‘new news’ given the post-meeting statements after the rate rises in October and this week, but the fourth Statement on Monetary Policy for 2009 from the bank contains a more detailed explanation as to why rates are going to continue rising.

Put simply, because the economy no longer needs the stimulus from ultra low rates. As remarked earlier this week, it’s back to ‘normal’ economic and monetary policy management of focusing on inflation (which will improve slowly) and employment, which will pick up midway through the new year.

The RBA remains optimistic about Australia’s recovery, saying growth in business investment and exports is expected to be strong, underpinned by an ongoing expansion in the resources sector and a bounce back in Asian economies, particularly China. They are sentiments expressed before, especially by Governor Glenn Stevens in a speech in Melbourne last night.

“Growth in business investment and exports is expected to be strong, underpinned by the ongoing expansion of the resources sector,” the bank said. “The outlook for Australia’s terms of trade has also improved, with some increase now expected over the next year or two.”

But that’s not to say there won’t be problems. The bank again makes mention of the under-building of new homes and the impact that is likely to have on home prices, it warns again of the damage the high value of the Australian dollar will do to trade exposed industries (exporters of all kinds and no doubt some importers who could face compressed profit margins) and there’s a sense that it remains very cautious about cost pressures given the way it sees the economy rebounding, especially in resources.

But it’s clear that rates are rising because the economy has recovered far more quickly than previous thought. The RBA forecast growth this calendar year will reach 1.75%, up from the August estimate of 0.50%. Next year it will be 3.25%, up from 2.25% in the August forecast.

It’s against that background that the bank said in its report today: “a further gradual lessening of monetary stimulus is likely to be required over time if the economy evolves broadly as expected.”

“Conditions in the global and Australian economies are significantly better than was expected when the Board lowered the cash rate to 3 per cent earlier in the year.

“The Australian economy is operating with less spare capacity than earlier thought likely, and the outlook for the next few years has improved.

“Given this assessment, the Board has judged it prudent to lessen the degree of monetary stimulus that was put in place when the outlook appeared much weaker, increasing the cash rate by 25 basis points at both its October and November meetings.

“The economy is expected to record growth of around 2.25% over the year to the June quarter 2010, a significant upward revision from the time of the August Statement,” when the bank had forecast growth of just 1%.

But that’s when some problems could start appearing, not in growth, but in the re-emergence of the two speed economy:

“Growth is expected to be particularly strong in the resources sector …. Growth outside the mining sector is forecast to be more moderate, reflecting the reallocation of resources within the economy. The recent appreciation of the exchange rate will be one of the factors contributing to this reallocation.”

That’s eco speak for labour, investment and other resources heading for the boom states of WA, Queensland and South Australia and the Northern territory, and away from Victoria and much of NSW (The Hunter Valley area might be an exception).

Employment will pick towards the middle of next year after being “subdued over the next couple of quarters” because workers are likely to have their hours restored by employers, before they take on new employees.

According to the forecasts, “underlying inflation is expected to moderate further over the year ahead as the lagged effects of the economic slowdown and the appreciation work their way through.”

“The central forecast is for underlying inflation to decline to around 2.25% cent by late 2010, before gradually increasing to around 2.5% over 2011. Year-ended CPI inflation is likely to rise over coming quarters as temporary factors that have held it down fade, and is expected to be similar to underlying inflation in 2010.” (And within the RBA’s target band of 2% to 3% a year, over time).”

“The easing in underlying inflation is, however, expected to be gradual, given that price pressures in the non-tradables component have been significant and broad-based in recent years,” the bank said, adding that if the economy rebounds more quickly as major markets grow then the higher investment and activity could “see capacity pressures re-emerging in the near term and further appreciation of the exchange rate. In this event, underlying inflation would be expected to decline by less than in the central forecast.”

And that’s the age old story of Australian development: too little preparation to growth (in terms of labour force policies, training, investment in infrastructure, and of course, the recent under-building of new homes and the slack release of new land by state and local Governments).

It’s what drove rates higher in 2007 and 2007-08 as the RBA battled to get inflation down from 5% to its target range of 2%-3%.