Australia Has Scope to Cut Rates, Delay Surplus Return, IMF Says

Australia has scope to lower its benchmark interest rate further and delay a return to a budget surplus this year should the global outlook deteriorate, the International Monetary Fund said.

“With expected inflation within the target range, the strong Australian dollar, and given efforts to return the budget to surplus this year, monetary policy should remain accommodative, and should act as the first line of defense against near-term adverse shocks,” the IMF said in a preliminary annual assessment of the nation’s economy in Sydney today.

The IMF report, part of a so-called Article IV consultation, said Australia’s economy will grow 3.25 percent this year, little changed from its forecast a year ago. It downplayed the likelihood of a hard landing in China, Australia’s biggest export market, and praised the Reserve Bank’s credibility and capacity to respond quickly to unexpected shocks.

“The Reserve Bank has the scope to lower interest rates and loosen monetary conditions to help buffer against a downside scenario,” the IMF said in the statement. “Australia’s modest public debt gives the authorities scope to delay their planned return to surplus and let the automatic stabilizers operate in the event of a sharp deterioration in the economic outlook.”

RBA Governor Glenn Stevens and his board lowered the cash rate by a total of 1.25 percentage points from November to June to help shield the economy from Europe’s debt crisis and slower growth in China. At 3.5 percent, the benchmark borrowing cost is still the highest among major developed economies.

The IMF’s report said the Australian dollar is “stronger than would be consistent” with just the structural shift that is re-orientating the economy toward mining.

There are “a number of factors contributing to the current high level of the Australian dollar, including the relative strength of the Australian economy, the gap between domestic and foreign interest rates, and to some extent increased portfolio investments into Australia,” the IMF said.

Should those factors ease, “the exchange rate would likely depreciate,” it said.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net