FED: IMF commends govt's timely response to global downturn

AAP General News (Australia)
08-08-2009
FED: IMF commends govt's timely response to global downturn

By Sandra O'Malley

CANBERRA, Aug 8 AAP - The International Monetary Fund has backed the federal government's
response to the global economic crisis - even giving an apparent green light to go further
into debt.

It is also warning central banks to be sure the global downturn is over before thinking
about raising official interest rates.

In its annual Article IV consultation with Australia, the IMF said the government's
stimulus measures were boosting activity and there was still further room to move if the
apparent pick-up went backward.

"The authorities' timely and significant macro-policy response cushioned the domestic
impact of the global financial crisis," the IMF said.

"Staff commended the quick implementation of fiscal stimulus and noted that the shift
into deficit was justified in current circumstances."

A drop in company tax receipts, particularly from the mining sector, as well as the
government's economic stimulus measures are expected to push the budget into $58 billion
deficit this financial year.

The IMF sees room for further stimulus, if needed.

"Staff and authorities agreed that, given the low level of public debt, there is scope
for further fiscal stimulus, if the outlook for growth weakens," it said.

But the IMF regarded monetary policy as the "first line of defence" for stimulating the economy.

Recent signals from the Reserve Bank are that the next movement in official interest
rates will be up rather than down.

In its quarterly statement, released on Friday, the RBA revised upwards its growth
forecasts, suggesting stronger-than-expected data and improved sentiment meant another
rate cut was unlikely to be necessary.

The official cash rate is at a 49-year low of three per cent, down from 7.25 per cent
last September.

The IMF, which completed its report on Australia in June, said the easing of monetary
policy had been appropriate, as was the current holding pattern.

"The substantial stimulus in train, and signs of recovery in consumer and business
confidence, should help support domestic demand," it said.

"However, staff and the authorities agreed that if the outlook for growth and inflation
weakens, there is scope to cut the policy rate further."

THE IMF warned against increasing rates too soon.

"The authorities agreed with staff on the need to be more cautious than normal in tightening
in view of the fragile state of the global economy.

"The return of the cash rate to neutral should wait until there are clear signs that
a sustainable recovery is under way."

The IMF also supported the government's plan to get the budget back into surplus over
the medium term.

But there was a proviso.

"The authorities agreed that if trend growth or the terms of trade are not as high
as assumed in the budget, further restraint on spending would be needed to return to surpluses
over a horizon consistent with the authorities objective."

Treasurer Wayne Swan was quick to note the IMF's positive assessment.

"The International Monetary Fund has today again commended Australia's response to
the global recession," he said in a statement.

"In the face of the worst global recession in 75 years, the IMF Article IV report shows
that Australia has the best performing economy of any developed country."

AAP so/jhp

KEYWORD: ECONOMY IMF

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