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 budget surpluses this year should the global outlook deteriorate, the International Monetary Fund’s executive board said.

“In the event of a sharp deterioration in the economic outlook, and hence revenue underperformance, delaying the return to surpluses could be an option, given Australia’s modest debt- to-GDP ratio,” IMF directors said in a statement in Washington. “Allowing automatic stabilizers to operate fully could also help relieve pressure on monetary policy.”

Reserve Bank of Australia Governor Glenn Stevens kept the key rate unchanged at 3.25 percent on Nov. 6 as inflation accelerates and the global outlook stabilizes. The central bank cut borrowing costs by 1.5 percentage points from November last year to October to help cushion the economy against Europe’s crisis and a slowdown in China that weakened commodity prices.

The Australian government has pressed the central bank to loosen monetary policy as it bids for a A$44 billion ($45 billion) swing in the budget back to the black in time for an election late next year.

“Directors agreed that the current accommodative monetary stance is broadly appropriate,” the IMF said. “They also concurred that there is scope for further easing if warranted by economic circumstances.”

Traders are pricing in a 70 percent chance the RBA will lower borrowing costs by another quarter percentage point to 3 percent at next month’s policy meeting, according to swaps data compiled by Bloomberg.

The IMF said the economy will grow 3.25 percent this year, little changed from its forecast a year ago, according to the statement, which was issued at the conclusion of a so-called Article IV consultation. Directors said Australia’s floating exchange rate remains a “critically important element” in the nation’s policy framework.

Currency Pressure

“They observed, however, that the Australian dollar, which remains moderately above its long-term average, has exerted pressure on non-mining tradable sectors, widening the current account deficit and net foreign liabilities,” the report said.

The local currency is up 1.3 percent this year and has closed above parity with the U.S. dollar for all but 23 days during the period.

The executive board praised a Financial Sector Assessment Program update that showed the Australian financial system is “sound, resilient, and well managed” and welcomed progress in boosting the competitiveness of the banking system.

The report showed that while Australia’s outlook remains positive, risks remain from a possible weakening in the international outlook and “elevated stress” in the global financial system.

“Directors underscored the need to preserve adequate policy space to respond to adverse shocks and to persevere with structural adjustments aimed at facilitating more balanced growth,” the report showed.

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

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