Interpac Business and Migration Solutions Melbourne Australia

(October 25, 2010)

THE International Monetary Fund (IMF) has warned Australia and its neighbours of the need to raise interest rates and cut government spending because of the economic strength of the region.

It says in its Regional Economic Outlook for Asia and the Pacific released in Jakarta today that strong economic growth in the area is set to continue as it leads the global recovery.

"Strong economic growth is leading to new policy challenges,'' it says.

Inflationary pressures are building and the region is set to remain an attractive destination for foreign investment given the sluggish economy recovery in the US and Europe.

Such capital flows could add further to domestic price pressures.

"We welcome the steps so far taken by policymakers to control inflation risks ... but more now needs to be done given the continued strong growth in the region,'' IMF's director for the region Anoop Singh said.

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"A faster withdrawal of the fiscal stimulus put in place during the global financial crisis would also help guard against the risks of overheating.''

The warnings come as economists try to second-guess when the Reserve Bank of Australia (RBA) will likely raise interest rates again.

The central bank has indicated that rates will need to rise if the economy grows as it expects.

However, this week's minutes of its October board meeting have thrown the strength of the Australian dollar into the mix of its policy deliberations, given its soothing impact on inflation.

The September quarter consumer price index is released next Wednesday.

There is also a political row brewing over threats by retail banks that they may be forced to raise mortgage rates beyond moves by the central bank because of their increasing funding costs.

The Federal Opposition had demanded Treasurer Wayne Swan take a stronger stance against the banks.

The IMF said economic activity continues to rebound in Australia driven by demand for its commodities that has raised the terms of trade to historically high levels.

"Growth was also boosted by high consumer confidence and tight labour market conditions, which supported private consumption, and public spending on infrastructure,'' the Washington-based institution said.

The IMF expects the Australian economy to grow by 3.0 per cent in 2010 and 3.5 per cent in 2011, compared with 1.2 per cent in 2009.

It expects private investment in mining and mining exports will take over from public demand as the main driver for growth.

More broadly, the IMF has increased its growth forecast for the region to eight per cent for 2010, nearly one percentage point higher than it forecast in April, led by robust growth in China and India - two of Australia's leading export destinations.

Regional growth is expected to moderate to a more sustainable pace of 6.8 per cent in 2011.

China said that its economy grew by 9.6 per cent in the year to the end of September, just beating economists' forecasts, but down from 10.3 per cent growth in the previous quarter.

Its annual inflation rate accelerated to 3.6 per cent, the fastest pace since October 2008.

China unexpectedly tightened borrowing conditions earlier this week.

TD Securities strategist Roland Randall said the Reserve Bank would look at this data more closely than usual, given its own minutes this week indicated that a decision to raise rates was "finely balanced''.

"China data showing that Australia's most important customer is recovering and not suffering the consequences of weak demand from its own customers reduces downside risks to hiking Australian interest rates sooner rather than later,'' he said.

(Source:news.com.au)