http://business.theage.com.au/busin...ting-interest-rates-20080924-4nh6.html?page=2
IMF warns against cutting interest rates
Peter Martin
September 25, 2008
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 report on the Australian economy released as the Reserve Bank struggles to keep Australia's foreign exchange market working.
The bank late yesterday announced plans to auction $US10 billion ($A11.9 billion) of American 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 has injected into the market several billion US dollars from its own reserves in the past week. The $US10 billion advanced to it from the US Federal Reserve will enable it to continue to keep the market open.
It will be auctioned tomorrow 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 enough to contain inflation, saying 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, lifting 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, 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".
Mr Rudd emerged from a discussion with investment bankers to declare that "Australia's main banks are seen to be strong, and are robust also in the marketplace".
Mr Rudd appealed to Republican and Democrat members of Congress to deal quickly with the US Treasury's proposed $US700 billion bank bail-out.
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 US financial system would get through its crisis if the bail-out passed quickly, but it was "in for a hard time".
Although released yesterday, the IMF report was finalised in August, before the September rate cut and before the latest turbulence on world financial markets. An update this month concedes 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.