IMF says RBA has room to ease policy if needed

WASHINGTON Thu Nov 15, 2012 6:52pm EST

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WASHINGTON (Reuters) - The International Monetary Fund on Thursday gave a stamp of approval to Australia's economic policies, commending the central bank's loose monetary stance and saying there was room to ease further if needed.

In its annual review of Australia's economy, the IMF said its directors also supported the government's budget-tightening plans.

Achieving a budget surplus for the year to June 30, 2013 is a key election promise of Australia's Labour government. In October, the government announced A$16.4 billion ($17 billion) in new savings and tax measures over four years to keep the budget on track for a small surplus.

"(The IMF directors) welcomed the intention to maintain budgetary surpluses over the medium term, thus strengthening fiscal buffers against future shocks and the long-term cost of population aging," the IMF said. "Directors noted nevertheless that, in the event of a sharp deterioration in the economic outlook, and hence revenue underperformance, delaying the return to surpluses could be an option."

The IMF said the Australian dollar is still a bit above its long-term average, hurting non-mining sectors and widening the current account deficit. They called on the government to continue to increase national saving, whether by reducing the budget deficit or increasing pension contributions.

Growth in resource-rich Australia has remained well apart from its developed peers in the euro zone and elsewhere, with the IMF earlier predicting national income should expand 3.25 percent this year, in line with potential.

The Reserve Bank of Australia (RBA) left interest rates unchanged at 3.25 percent last week, having cut by 150 basis points since November last year. It left the door open to more easing and markets are pricing in a 50-50 chance of a move in December.

The IMF also reviewed Australia's financial sector, finding it "sound, resilient, and well managed." However, financial risks remained, including from high household debt and house prices, and reliance on offshore funding.

(Reporting by Timothy Ahmann and Anna Yukhananov; editing by Carol Bishopric)

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