The Paris-based economic forecaster says the interest rate increases should rein in inflation within the Reserve Bank of Australia's (RBA) target range of between 2-3% next year. "Interest rates are close to a level that should ensure inflation returns to the target over the coming year. Modest interest rate cuts from late 2007 should not jeopardise inflation stabilising around midpoint target," the OECD report said. The OECD expects inflation to drop from 3.7% this year to an average of 2.8% in 2007. The RBA head of economic analysis department, Tony Richards said inflation could fall even further as fuel prices and the cost of bananas return to normal levels. The annual inflation rose to 3.9% in the quarter ending September 2006, prompting the RBA to raise interest rates for the third time this year to 6.25%, the highest level in almost six years. It's not all-good news, however. The report predicts Australia's economic expansion will slow down to 3% next year due to the effect of the drought on the agricultural sector. However, the OECD expects the economy to resume full power again in 2008, growing by 3.4% as solid foreign demand offsets the sluggish domestic demand.