IMF Says Australia Well Placed to Weather Downturn

By Jacob Greber

Sept. 24 (Bloomberg) -- Australia is well placed to weather the global downturn and contain inflation pressures as the nation's economy slows, the International Monetary Fund said.

The IMF's executive board welcomed the Reserve Bank of Australia's decision to reduce the benchmark overnight cash rate target by a quarter point to 7 percent earlier this month.

Central bank Governor Glenn Stevens cut borrowing costs on Sept. 2, saying the risk of leaving rates too high for too long outweighed the danger of stoking inflation. The IMF's annual Article IV report, published today after talks with Stevens and Treasurer Wayne Swan, also welcomed Australia's ``readiness to follow a cautious monetary policy aimed at achieving the 2 percent to 3 percent inflation target range over time.''

``Wage and price developments in particular will require careful monitoring, taking into account the high core inflation and pressures stemming from the commodity-price boom,'' the Washington-based fund said.

The IMF also said the government's decision to slow public spending growth and expand its budget surplus will help reduce inflation.

``Looking ahead, if growth and revenues are stronger than expected, directors recommended that the surplus be allowed to exceed budget forecasts until it is clear that inflation will decline,'' the report said. ``There should be scope to reduce taxes or increase spending over the medium term.''

`Uncertain Outlook'

The government in May forecast a budget surplus of A$22 billion ($18 billion) for the 12 months through June 2009. Swan is scheduled to review the government's forecasts before the end of the year.

``The IMF considers that the outlook for the economy is more uncertain than usual due to large countervailing forces impacting the economy,'' Treasurer Swan said in an e-mailed statement today.

A mining boom, stoked by China's demand for natural resources, provides ``a substantial stimulus'' just as the global slowdown exerts ``a contractionary effect,'' Swan said.

The A$1 trillion economy grew 0.3 percent in the second quarter from the previous three months, the weakest pace in more than three years, as consumers cut spending for the first time since 1993.

Growth Forecast

The IMF forecasts that the economy will expand 2.7 percent this year after growing 4.3 percent in 2007. The Reserve Bank expects the economy will advance 2 percent in 2008 and 2.5 percent in 2009.

Minutes of the central bank's Sept. 2 meeting, when it reduced borrowing costs for the first time since 2001, showed Governor Stevens' goal of cooling inflation, which accelerated to 4.5 percent in the second quarter, means monetary policy could ``need to be on the restrictive side of normal for some time ahead.''

``IMF directors considered that the sound macroeconomic framework should permit Australia to weather the global downturn and contain inflationary pressures,'' today's report said.

``Executive directors commended the Australian authorities on their impressive economic management in the fiscal, monetary and structural areas, which has spurred a sustained and long- lasting economic expansion.''

Banking System

The IMF report also said while Australia's banking system is sound, ``some vulnerabilities remain.''

``Directors noted that the banking sector remains profitable and well capitalized. However, they encouraged the authorities to monitor carefully the sector's vulnerability to rollover risks arising from short-term wholesale funding and to the risks associated with the large indebtedness of the household sector,'' the report said.

Today's report also includes an earlier assessment of Australia's economy by the fund's staff based on talks with Stevens, Swan and Treasury Secretary Ken Henry in June and July.

That assessment, written before the central bank cut borrowing costs this month, said policy makers may have to increase interest rates.

``On inflation, the risks are clearly on the upside, reflecting capacity constraints, especially in the mining and housing sectors,'' the staff's Aug. 8 report said.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net