The International Fund (IMF) says in a consultation paper following discussions with Australian authorities and a range of private sector institutions that the economic outlook was more uncertain than usual, due to large countervailing forces
Inflation risks in Australia are clearly on the upside and the Reserve Bank should be quick to lift rates if economic growth does not slow down as expected
The IMF continued that the balance of risk to growth is tilted towards the upside
This arose in the recent jump in commodity prices, sizable immigration flows and the increase in State infrastructure spending
These factors could offset to the impact of weaker consumer and business confidence and support domestic demand
On inflation the risk is clearly on the upside.
Increases in energy prices e.g. oil are in the pipeline and capacity constraints, such as in the mining and housing sectors could cause a higher CPI than expected.
Farm output may also not respond from the recent drought.
The IMF said that the baseline forecast is that real gross domestic product trend will decline over the next two years, easing domestic capacity constraints and returning CPI inflation back to target band over the next two to three years.
With inflation risks on the upside, and leading indicators showing that the domestic economy will not slow the IMF supports the RBA inflation- targeting framework. It also supports Federal Government's strategy in the latest budget to save the revenue windfall from the commodity boom.
The reduction in public spending growth illustrates the Government commitment to reduce inflation.
Once inflation moderates then as the RBA reduces the cash rate then inflation moderates.