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IMF warns Govt of possible inflation -

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TONY JONES: As the politicians start throwing money around, a warning has come from the
International Monetary Fund (IMF) that Australia needs to be careful about what it spends. The
fund's latest World Economic Outlook forecasts that global growth will slow, but India and China
will continue to surge ahead. And the IMF says Australia will have to carefully manage inflation.

Helen Brown reports.

HELEN BROWN: The Australian economy's booming and just a few days ago the Federal Government
promised to share the gains, with $34 billion in tax cuts.

Labor is still assessing just how far it can go. And as the election campaign moves into full swing
the International Monetary Fund says Australia needs to stick to a policy of tight fiscal
restraint.

JOSHUA WILLIAMSON, TD SECURITIES: It is a timely reminder to both political parties to actually use
caution and use some fiscal prudence when it comes to dolling out election promises.

HELEN BROWN: The IMF report says Australia has felt the fallout from the troubles in the high risk
end of the United States housing market.

But the main short-term policy challenge continues to be to keep a firm control on inflation in the
face of strong domestic demand and tight labour markets.

Australia's strong terms of trade have been supported by the fast growing economies of Asia and
according to the IMF, the influence of India and China on global growth has reached a level not
seen before.

SIMON JOHNSON, INTERNATIONAL MONETARY FUND: This year we expect China and India will be the two
largest contributors to global growth measured in PPP terms. As noted in my forward, this is the
first time based on the IMF's measurements that this will be the case.

HELEN BROWN: It's the outlook for the US economy that's most telling with weak growth of 1.9 per
cent growth expected into 2008.

SIMON JOHNSON: The primary risks to the outlook with on the downside.

HELEN BROWN: The US credit crisis is also anticipated to drop world growth to back below 5 per
cent, but 4.8 per cent is still considered a solid figure.

The IMF assessment of ongoing global growth comes at an intense time for the Reserve Bank. Next
Wednesday it will be looking at the Consumer Price Index, a key measure of inflation and one which
will signal if the bank has to raise interest rates again.

JOSHUA WILLIAMSON: I think the RBA (Reserve Bank of Australia) is feeling considerable pressure at
the moment. They're looking down the barrel at the possibility of having to raise rates in an
election cycle, something which happens very rarely.

HELEN BROWN: The Reserve Bank meets in early November. Helen Brown, Lateline.