April 22 (Bloomberg) -- Australian and New Zealand central banks can cut interest rates further, making them better placed than counterparts to cushion their economies from the global recession, the International Monetary Fund said.

“Conservative monetary and fiscal policy management in these economies now leave policymakers better placed than those in other economies to mitigate further declines in demand,” the IMF said in it world economic outlook released in Washington today. “Policy rates have been cut rapidly and can be cut still further.”

Australia’s central bank Governor Glenn Stevens cut his benchmark lending rate last week to a 49-year low of 3 percent, the same level set on March 12 by Alan Bollard, who heads the Reserve Bank of New Zealand, where rates are now at a record low. Both economies will contract this year before expanding again in 2010, the IMF predicts.

“The slump in demand in the U.S. and Asia and the drop in commodity prices are weighing on activity,” the IMF said. “Households are also suffering wealth reduction as equity markets and, to a lesser extent, house prices have fallen after rapid rises through 2007.”

Australia’s gross domestic product will fall 1.4 percent this year, before rising 0.6 percent in 2010, the IMF predicts. Unemployment will jump to 7.8 percent from the current rate of 5.7 percent.

The predictions reflect the assessment of Governor Stevens, and Australia’s Prime Minister Kevin Rudd, both of whom this week said for the first time that the nation’s economy is in its first recession since 1991.

Government Aid

To spur domestic demand, Stevens has cut borrowing costs by a record 4.25 percentage points since September, and Rudd in February said his government will spend A$42 billion ($30 billion) on cash handouts to taxpayers and on infrastructure.

“After years of running surpluses, fiscal positions are robust and substantial fiscal stimulus is being provided,” the IMF said.

“However, owing to the relatively high dependence on demand from the U.S. and Asia, and on external financing, there are limits to what domestic policy measures can achieve,” the IMF said, referring to both New Zealand and Australia.

New Zealand’s economy will probably contract 2 percent this year and expand 0.5 percent in 2010, it said.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

Last Updated: April 22, 2009 09:00 EDT