Friday, June 26, 2009

'Foot above the accelerator, not the brake'


In a generally positive assessment of the Australian economy the International Monetary Fund has implored our Reserve Bank to be "more cautious than normal" when deciding whether to tighten interest rates, describing international conditions as "fragile".

The Fund has backed an OECD forecast that this year's downturn will be milder than predicted in the Budget and next year's recovery stronger.

Whereas two months ago the IMF was expecting the Australian economy to go backwards 1.4 per cent in year-average terms in 2009 it now expects a contraction of only 0.5 per cent. Whereas it was expecting an anemic recovery of 0.6 per cent next year it now expects 1.5 per cent.

Treasury Secretary Ken Henry yesterday confirmed that he too expected growth to be "somewhat stronger" than forecast at Budget time...

...but that it was "too early" to upgrade the budget figures.

"It may be that there is some upside to our forecasts, but really it is too early to tell,'' he told local government representatives in Canberra.

The IMF has given the green light to further government stimulus packages if needed saying Australia has more "fiscal space" than most countries to boost its economy and is one of the very few to have mapped out a plan to return to surplus.

"If additional fiscal stimulus is deemed necessary, our analysis suggests that the impact on growth is highest for public investment spending," the consultation report says. "Transfers targeted to low-income households have a faster yet still large impact, and could be the most appropriate measure if a prompt demand impetus is required."

But report says the IMF would prefer interest rate cuts to stimulus spending "as the first line of defence," and asks the Reserve Bank to be "more cautious than normal in tightening," saying a lift in rates can wait "until there are clear signs that a sustainable recovery is underway".

Both Westpac and the Commonwealth Bank yesterday penciled in rate hikes next year nevertheless after at least one further rate cut this year. Westpac expects the Reserve Bank to cut its cash rate from 3.0 per cent to a low of 2.50 before tightening, the Commonwealth to 2.75 per cent.

Financial markets are pricing in a 4.0 per cent cash rate by next August, a full one percentage point higher than at present, implying a rebound in the standard variable mortgage rate to around 6.75 per cent.

The Roy Morgan consumer confidence index yesterday jumped to its highest level since February 2008 and the Investment & Financial Services Association's investor confidence index to its highest point since August 2007.

Published in today's SMH and Age