SYDNEY Feb 13 The IMF has cautioned Australian
policymakers against embracing fiscal austerity in the short
term for fear of undermining growth at a time when the economy
is getting over the hump of a long mining boom.
A report released on Thursday by the International Monetary
Fund's executive board warned that the Liberal-National
coalition government's plans for fiscal tightening should be
carried out "without undue prejudice to growth".
The coalition government has foreshadowed that tough
spending cuts would be needed in its annual budget in May to
make up for a shortfall in revenue.
The IMF forecast economic growth would pick up only slightly
to 2.6 percent this year from a projected 2.5 percent in 2013.
"Staff supported the broad aim of improving the budget
position over the medium term...but cautioned that it should be
done in a way that does not disrupt growth prospects in the near
term," the report said.
The IMF has changed its tune on budget austerity in recent
years, conceding that fiscal tightening had done more damage
than it expected, especially in Europe.
The Fund noted that while Australia had outperformed many
advanced economies in recent years, it was vulnerable now that a
long boom in mining investment had peaked and as the local
currency was "modestly overvalued" in real terms.
"With growth currently on the soft side, the real exchange
rate still strong and efforts to reduce the budget deficit
likely, monetary policy should remain accommodative and act as
the primary macroeconomic tool for managing aggregate demand in
the near term," the report concluded.
The Reserve Bank of Australia (RBA) recently signalled that
interest rates were likely to stay at an historic low of 2.5
percent for some time amid signs of a recovery in housing and
consumption and a pick-up in inflation.
A revival in home building would help support the economy in
the short term, but it had also come with an acceleration in
home prices. After a couple of years of softness, prices rose
almost 10 percent over 2013.
"There is a risk that rapid house price growth could give
rise to expectations-driven, self-reinforcing demand dynamics
and price overshooting, and the authorities would need to be
prepared to take preventative actions," the IMF said.
Then again, Australia's framework of intense and proactive
supervision would limit the impact of swings in home prices on
the financial system as a whole, the report noted.
(Reporting by Wayne Cole; Editing by Eric Meijer)