Thursday, September 30, 2010

Tread warily on rates: IMF

AS HOME owners brace for an expected rate rise next week, the International Monetary Fund has challenged the Reserve Bank's forecasts that the economy faces a boom ahead, and implied that it should wait and see before acting.

In its latest report on Australia, released at midnight, the IMF also endorses the government's timetable for reducing the deficit now under fire from leading economists and Treasury itself.

The IMF does not directly criticise the RBA. But in pointed comments, it suggests the economy's future is more clouded and uncertain than the Reserve implies. It forecasts that Australia's growth next year will be between 3 per cent and 3.5 per cent, not the 3.75 per cent forecast by the RBA.

Moreover, the IMF says, the risks from the global economy "are tilted to the downside", so there is more chance that Australia will end up below its forecast than above it.

"It was appropriate for the RBA to start withdrawing stimulus in late 2009," it says. "However, capital market turbulence generated by European sovereign debt concerns has increased uncertainty about prospects for a world recovery next year.

"With lending rates in Australia close to their recent historical averages, and economic activity responding quickly to cash rate adjustments, the RBA has scope to wait for the outlook to become clearer."

Following a series of bullish speeches by RBA chief Glenn Stevens and other senior officials, the markets now expect the Reserve's board to raise rates again on Tuesday its seventh rate rise in a year.

Private bank economists are also tipping an eighth rate rise before Christmas, as the central bank tries to offset inflationary pressures from a boom in mining investment in WA by slowing the rest of the economy.

The IMF warns Treasury and the government that "the growing dependence on mining may amplify the business cycle", with bigger booms but also bigger busts when commodity prices fall. It advises them to be ready to move in either direction.

The IMF also backs the mining tax in principle, but says the original version of the tax was better than the watered-down version. In particular, it urges the government to extend the tax to all minerals, not just iron ore and coal.

Macquarie Bank economists, meanwhile, criticised calls for faster spending cuts, pointing out that existing deficit reduction plans, if delivered, would see the fastest cut in the deficit since records began.