Wednesday, September 24, 2008

The IMF lectures Australia


The International Monetary Fund has cast doubt on the wisdom of next month’s expected interest rate cut, warning that Australia may soon need to increase rates.

The assessment comes in a generally positive assessment of the Australian economy released on as the Reserve Bank struggles to keep Australia’s foreign exchange market working.

The Bank late yesterday announced plans to auction $US10 billion of US currency in order to stop the so-called forward foreign exchange market from seizing up.

The market stopped working for some hours last week and is under pressure as the end of the quarter approaches and Australian companies try to roll-over foreign currency swap contracts.

The Reserve Bank has injected into the market several US billion of its own reserves in the past week. The $US10 billion advanced to it from the US Fed will enable it to continue to keep the market open...

The $US10 billion will be auctioned on Friday, and the outcome announced on Monday.

The Australian auction plus others announced yesterday and those announced last week will take the total the US has injected into offshore markets to $US210 billion.

The IMF report expresses doubt about whether Australia’s economic growth will slow by enough to contain inflation saying that the “balance of risk to growth lies on the upside, stemming from an extraordinary jump in commodity prices”.

It concludes that a portion of the boost to Australia’s terms of trade is “likely to be permanent,” boosting the Australian dollar above its long-term average and putting pressure on inflation.

It recommends that “monetary policy be tightened quickly if leading indicators suggest that domestic demand will not slow as expected or the outlook for inflation deteriorates.

In New York the Prime Minister Kevin Rudd welcomed the IMF’s assessment saying it had “delivered a very strong positive report card on Australia, and on the robustness of our regulators, the strength of our banks, and our ability to see our way through this global economic downturn''.

He did not address the IMF’s concern about inflation.

Mr Rudd emerged from a round-table discussion with investment bankers to declare that “Australia's main banks are seen to be strong, and are robust also in the market place.”

The group included senior figures from the Macquarie Bank, Goldman Sachs and UBS Investment.

Mr Rudd appealed to Republicans and Democrats Congressmen to deal quickly with the US Treasury’s proposed $US 700 billion bank bailout.

Media magnate Rupert Murdoch spent an hour with Mr Rudd at the residence of the Australian Ambassador to the UN. He told reporters he thought the American financial system would get through the financial crisis if the bailout passed quickly, but was ``in for a hard time''.

Although released Wednesday, the IMF report was finalised in August, before the September rate cut and before the latest turbulence on world financial markets.

An update to the report added in September concedes that the Australian economy is now slowing but maintains that it may still be necessary for the Reserve Bank to adjust interest rates in order to contain inflation.