BUDGET 2011 ECONOMIC ANALYSIS: WIll the Reserve's boss be happy?

Treasurer Wayne Swan said his 2011/12 budget would be "unpopular".

Like beauty, this will be in the eye of the beholder as people become overwhelmed by the traditional post-budget wash-up over the coming days, weeks and months ... it may seem like forever.

But will Reserve Bank governor Glenn Stevens be happy and chipper when he thumbs through the newspapers.

Or will he be shaking his head in disappointment.

It's probably the biggest question of the day, and will make a big difference to the millions of borrowers around the country.

The Reserve Bank has already warned that interest rates are likely to rise "at some point" for inflation to remain consistent with the central bank's two to three per cent target.

Financial markets are already pricing in a 50/50 chance of a rise in the 4.75 per cent cash rate in July, and an even greater risk of a move thereafter.

In the outlook of its quarterly monetary policy statement released last Friday, the central bank said the medium term outlook will be dominated by the expected build-up in mining investment and the boost to incomes from the high terms of trade.

"Providing a partial offset to these factors, monetary policy is mildly restrictive, the exchange rate has appreciated substantially and fiscal policy will be contractionary over the next couple of years," the statement said.

"Nevertheless, inflationary pressures are expected to build gradually over the forecast period as spare capacity is absorbed and the labour market continues to tighten."

Has anything changed with the handing down of the treasurer's fourth budget.

Not really.

But neither has the budget position got any worse.

Yes, there has been some slippage in the current financial year to close to a $50 billion deficit, and the 2011/12 deficit has almost doubled.

But that was to be expected given the impact from the spate of natural disasters in Australia, Japan - our second biggest trading partner - and our closest neighbour, New Zealand.

The impacts of these floods, earthquakes, cyclones and tsunami have been well flagged by Treasury, and the central bank itself.

Which brings us to the 2012/13 financial year.

The predicted surplus is now $3.5 billion, a hair's breadth of a difference from the $3.1 billion predicted in the mid-year budget review.

Stevens will be happy that the budget can still make this quick turnaround to a surplus if all goes to plan.

But it's hardly likely to be a game changer for interest rates in the short-term.

Swan says Australia's budget position and net government debt is the envy of the world, being tiny in comparison with the real debt mountains in the major developed countries and their massive deficits.

Economic growth of around four per cent in 2011/12 and an unemployment rate of 4.5 per cent in the next couple of years will also have other parts of the world looking twice.

But it all means, sadly, the official cash rate will rise to 5.0 per cent from 4.75 per cent in the next couple of months, and possibly 5.25 per cent by the end of the year.

Stevens won't necessarily be unhappy, but he'll unlikely be kicking up his heels ... if central bank governors every do that sort of thing.

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