Australia interest rates may need to rise again: IMF

Australia's interest rates may have to be raised again given the risks to underlying inflation after 15 years of economic expansion, the International Monetary Fund said on Tuesday.
In its latest update on the Australian economy, the IMF said the Reserve Bank of Australia's (RBA) two rate increases this year had been appropriate given that the prospects for inflation had risen due to higher commodity prices and a lack of spare capacity in some parts of the economy.
The central bank raised it cash rate in May and August, taking it to a five-year high of 6.00 percent, and financial markets are priced for a further rise to 6.25 percent by year-end.
"Further monetary tightening may eventually be needed if domestic demand growth or other factors lead to an increase in underlying inflation," the IMF said in a statement. Figures on Australian consumer prices for the third quarter are due on Wednesday and are widely expected to show a pick-up in underlying inflation.
The IMF commended Australia's strong fiscal position, but noted that the fiscal stance was midly stimulatory at a time when inflation pressures were growing. "Directors recommended that the fiscal surplus be allowed to exceed budget targets if growth and revenues are higher than expected," the IMF said.
Such advice may not be entirely heeded given the Liberal-National government has to fight an election next year and economists suspect it will be tempted to cut taxes and boost spending to lure votes. The IMF argued that any extra tax revenue should be used to promote the National Reform Agenda, which seeks to lift productivity and labour participation.
The IMF noted reform was lagging in some crucial areas such as water trading, and supported the broadening of the reform agenda to cover education, training and healthcare. "They (IMF directors) considered that such an investment in reforms would help sustain strong economic growth and better position Australia to address the challenges of an ageing population and rising healthcare costs," said the report.