ECONOMISTS are forecasting a booming economy and soaring interest rates in 2010  despite new figures showing growth slowed to just 0.2 per cent in the September quarter.

The Age - 17th Dec 2009 - By TIM COLEBATCH ECONOMICS EDITOR With ERIC JOHNSTON

ECONOMISTS are forecasting a booming economy and soaring interest rates in 2010  despite new figures showing growth slowed to just 0.2 per cent in the September quarter.

Westpac chief economist Bill Evans said yesterday's surprisingly weak GDP figure looked to be the low point in the economic cycle, and the economy was already heating up rapidly.

"Momentum in domestic spending is likely to build through (the December quarter) and 2010," Mr Evans said. "We expect to see annual growth in domestic demand accelerate to around 4.5 per cent over the year ahead."

Yesterday's figures show domestic demand  total spending by consumers, business and governments  rose just 0.1 per cent in the year to September. Household spending rose 1.8 per cent, but business, housing and government investment all plunged.

The figures mean Australia has lost its title as the Western world's fastest-growing economy. The Bureau of Statistics estimates that gross domestic product (GDP) grew just 0.5 per cent in the year to September 30.

As the figures were released, Reserve Bank deputy governor Ric Batellino sought to dampen expectations of another spate of interest rate rises in 2010, confirming that the Reserve board now believed it had lifted rates "back into the normal range, though in the expansionary segment of that range".

Mr Batellino's comments imply that after three rate rises in as many months, the Reserve might now take its time pushing them higher. The comments sparked a half-cent plunge in the Australian dollar, and led markets to drastically lengthen the odds of a fourth rate rise when the Reserve board next meets on February 2.

But economists were not convinced. Mr Evans forecast that the Reserve would deliver three more interest rate rises by the middle of next year. His Commonwealth Bank counterpart Michael Blythe predicted five rises by next Christmas.

If that proved correct, it would add about $228 a month to the cost of servicing a typical $300,000 mortgage, even assuming banks do not add their own increases on top of the Reserve's.

Westpac customers with a mortgage that size have already seen their monthly bills soar by $176 since October, and customers of other banks have copped only slightly smaller rises.

Mr Batellino weighed in to the controversy to defend the banks yesterday. Speaking to bankers in Sydney, he said that if the banks had not increased their lending rates by more than the Reserve increases, they would now be operating at a loss.

"That would have threatened their ability to keep raising funds and, in turn, their capacity to lend," he said.

Mr Batellino conceded that the banks had overdone it on rate rises, and had increased their margins  mainly to businesses  by more than their increase in costs. He estimated that total bank margins were now running 0.2 percentage points higher than when the global financial crisis began.

But he said excessive rate rises by banks would reduce the need for the Reserve to raise rates further. "If interest rates in the economy are rising relative to the cash rate, there is less need for the cash rate to rise," he said.

Westpac chief executive Gail Kelly was forced to defend the bank against recent controversy at its annual meeting, telling shareholders she stood by the decision to increase mortgage rates by almost double the Reserve's increase.

"Our cost of raising money  the money we lend to businesses and individuals  has gone up dramatically since the global financial crisis began," Ms Kelly said. "They are tough decisions and we expected there would be a response."

The weak GDP figures sparked the usual argument between Government and Opposition. Treasurer Wayne Swan warned that it underlined the risks in removing the Government's stimulus, while shadow treasurer Joe Hockey demanded that the Government "pull back its massive spending program".

Mr Swan said it was only the stimulus that had kept the economy afloat. "If we had done nothing, I would be standing here announcing Australia's fourth consecutive quarter of negative growth," Mr Swan said.

He released Treasury estimates that the stimulus has added 2.5 percentage points to growth over the past year  making the difference between the economy growing by 0.5 per cent or going backwards by 2 per cent.

"That means there are tens of thousands of Australians who are in jobs who would not have been in jobs this Christmas," he said. "There are tens of thousands of businesses open for their customers to walk in the door, that would not have been open."

Mr Hockey said the stimulus was driving up rates. "Government expenditure is focused on winning the next election, it's not focused on the best interests of the Australian economy," he said.