Fed: Economists doubt IMF's optimism on inflation

AAP General News (Australia)
04-29-2010
Fed: Economists doubt IMF's optimism on inflation

By Colin Brinsden, Economics Correspondent

CANBERRA, April 29 AAP - The International Monetary Fund (IMF) believes Australian
inflation can stay within the official two to three per cent target band this year.

Financial markets are not so optimistic, and with disruptions in Europe caused by the
Greek debt crisis getting no worse at this stage, they have started to price in a greater
risk of an interest rate rise next week.

The IMF's Regional Economic Outlook for Asia and Pacific released on Thursday came
just 24 hours after the consumer price index (CPI) rose by a larger than expected 0.9
per cent in the March quarter.

This saw the annual inflation rate jump to 2.9 per cent from 2.1 per cent in the year
to December.

Combined with underlying inflation stubbornly holding around 3.0 per cent and a solid
rise in the producer price index on Tuesday, economists believe inflation will inevitably
breach the top of the target band.

"I can't see how it can stay under that," Nomura Australia chief economist Stephen Roberts said.

"Even a modest improvement in the underlying is now dubious because we haven't got
much spare capacity and the PPI has now turned strongly for the first quarter."

While Mr Roberts still believes homeowners will be spared a third interest rate rise
in a row at next Tuesday's monthly Reserve Bank of Australia (RBA) board meeting, other
economists believe the central bank will lean towards another increase.

"We expect a 25 basis point hike in May, though this is a close call," NAB Capital
chief economist Rob Henderson said.

Still, if Europe's problems worsen or widen - Spain's credit rating was downgraded
by Standard & Poor's on Wednesday - the RBA could hold fire.

"The recent fiscal troubles in Greece underline the ongoing legacy of the global recession,"

Prime Minister Kevin Rudd told a NSW Business Chamber breakfast on Thursday.

He said Greece's own credit downgrade to junk status this week, and the subsequent
shockwaves it caused, was again a reminder how financial markets are "increasingly interconnected".

In the same vein as last week's broader World Economic Outlook, the IMF noted the Australian
economy escaped a recession "altogether" and is "recovering rapidly in part due to strong
demand from China".

"The Australian economy is expected to grow by 3.0 per cent in 2010 and 3.5 per cent
in 2011, with private domestic demand taking over from public demand as a main driver
of growth," it said.

Mr Rudd said just as Australia has been the "envy of the world" during the global downturn,
it must capitalise on its position.

"That is the context of the Henry (tax) review and the budget,' he said.

"If we get these decisions right, take bold action to capitalise on our strong position,
then I believe we can set Australia up for the next generation of prosperity."

Treasurer Wayne Swan will release the Henry review and the government's initial response
to it on Sunday, and his third, and final budget ahead of the year's federal election,
on May 11.

Mr Rudd said the government's response to the Henry review will make the tax system
"stronger, fairer and simple".

"A strong tax system should raise revenue in the most efficient and simplest way possible,"

he said.

"Many of our existing taxes reduce productivity and detract from the overall efficiency
of the system."

AAP cb/sb/mn

KEYWORD: ECONOMY WRAP

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