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IMF urges pre-emptive action on rates -

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ELEANOR HALL: The International Monetary Fund is advising central banks to take pre-emptive action
to control asset price bubbles by raising interest rates. In research released overnight, the world
banking body says monetary policy was not the main cause of the global financial crisis, but that
it did play a part.

Finance reporter Sue Lannin has more.

SUE LANNIN: Did low interest rates encourage reckless lending and thus lead to the global financial
crisis? The International Monetary Fund says there was evidence that monetary policy was too loose
in the years before the meltdown but it was not the main cause of the crisis.

IMF senior economist Alasdair Scott says there were warning signs that policy makers could have
heeded.

ALASDAIR SCOTT: We don't see evidence that monetary policy was the smoking gun, we don't see
evidence that monetary policy was the main systematic cause of the crisis, but that's not to say
that monetary policy was entirely without blame.

Now interest rates were certainly low in the immediate aftermath of the .com crisis and some say
that that was the cause of the crisis, but we think that there are too many exceptions in terms of
countries experiences with asset prices for this to hold.

SUE LANNIN: The IMF has urged central banks to take pre-emptive action and raise interest rates to
prevent asset price bubbles even when inflation is not a concern. Alasdair Scott wants policy
makers to take a boarder approach.

ALASDAIR SCOTT: There might be times even when inflation is under control, but they should think of
what's happening in asset price markets to see whether these, there are these kind of financial
vulnerabilities building up.

And if that's the case they should strongly consider taking pre-emptive action and not think that
we can just pick up the pieces after the crisis has happened should that be the case.

SUE LANNIN: The Reserve Bank says it will raise interest rates from what it's called emergency
levels sooner rather than later to keep inflation under control. Interest rate strategist at
Macquarie Group, Rory Robertson, says the issue of pre-emptive action is a debate that has been
going on for years.

RORY ROBERTSON: The thinking is basically, central banks have done a good job at keeping goods and
services price inflation low and now there's a question mark about whether central banks can do
something over and above targeting inflation.

SUE LANNIN: Don't you though, if you raise interest rates too early, say in the case of Australia,
don't you risk stamping out any fragile economic recovery?

RORY ROBERTSON: Right now we're in the, the economy's very weak phase and I think central banks
everywhere will be very cautious about raising rates aggressively because they don't want to nip
the recovery from the biggest global recession in generations, they don't want to nip that recovery
in the bud.

SUE LANNIN: Keynesian economist Professor Geoff Harcourt is Emeritus Reader in Economics at
Cambridge University. The Governor of the Bank of England, Mervyn King, is one of his pupils.

He says higher interest rates have to be applied with caution.

GEOFF HARCOURT: I don't think the interest rate is the appropriate weapon to use. We are a bit
constrained, well very much constrained because we have floating exchange rate all around the world
now. I still think that those people who advocated that running capitalism in the long term
required interest rates to be low and to kept there and to use other forms of policy to bring about
growth and full employment.

ELEANOR HALL: And that's Professor Geoff Harcourt from Cambridge University, ending that report by
Sue Lannin.