IMF: Memo To Australia - Keep Rates Low And Cut The Budget Deficit Carefully

Getty/Chung Sung-Jun

The IMF Country report released overnight was a full examination of the economy and besides noting that the Aussie dollar should fall by about 5-10%, the IMF added that the RBA needed to keep interest rates low and that the Abbott Government’s drive toward fiscal austerity was necessary.

On interest rates, the IMF said:

the RBA’s monetary policy stance as broadly appropriate. Inflation is within the target range and inflation expectations remain well anchored. With growth currently on the soft side, the real exchange rate still strong, and efforts to reduce the budget deficit likely, monetary policy should remain accommodative and act as the primary macroeconomic tool for managing aggregate demand in the near term.

It’s a message the RBA is likely to heed, particularly if the Aussie dollar fails to fall in the manner it wishes and the IMF forecasts.

On the fiscal, or budget side, it is difficult for many to understand why the Abbott Government is intent on an austerity drive and privatisation process given that, as the IMF says, “Australia’s fiscal position compares well to its advanced economy peers.”

The IMF appears to agree with the Abbott Government’s aim to achieve Budget deficits of 1% of GDP, as it will help rebuild “fiscal buffers” which will be necessary to provide “fiscal policy space to respond in the event of a deterioration in the outlook”.

The IMF says that this implies that spending will need to be cut over the next 10 years in the order of 3% or the deficit will reach 2% of GDP per annum.

But in a warning to the Treasurer Joe Hockey the IMF Staff were clear in the risk that fiscal austerity posed for the economy and “cautioned that it should be done in a way that does not disrupt growth prospects in the near term.”

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