IMF urges earlier lift in interest rates

CANBERRA - The IMF has backed the Reserve Bank of Australia's (RBA) intention to lift the cash rate in coming months and not leave it at an "emergency" level for any longer than necessary.

The International Monetary Fund (IMF) is urging central bankers to be more pre-emptive - lifting interest rates earlier and more vigorously to prevent dangerous excesses building up in asset and credit markets, "even if inflation appears to be largely under control".

An IMF analysis released in Washington says asset price busts were often foreshadowed by rapidly expanding credit, deteriorating current account balances and large shifts into residential investment.

"With inflation typically under control, central banks effectively accommodated these growing imbalances, raising the risk of damaging busts," it said.

The RBA has kept the cash rate at a 49-year low of 3 per cent since April, but has warned borrowers that rates will rise in coming months.

Minutes from the central bank's September board meeting released last week show that its board is balancing between the risk of keeping the cash rate too low for too long, and prematurely tightening policy that could risk adversely affecting confidence and demand.

"The meeting concluded that the balance was best struck by leaving the cash rate unchanged for the time being, pending further evaluation of incoming information at future meetings," it said.

Given that recent economic data have been mixed, financial markets are pricing in a 60 per cent chance of a rise in the cash rate to 3.25 per cent in November, while fully pricing in such a move in December.

RBA Governor Glenn Stevens is due to appear before a Senate inquiry into the federal Government's fiscal stimulus on Friday, along with Treasury Secretary Ken Henry.

The IMF said there was evidence that monetary policy was too loose in some countries in the years leading up to the global crisis, but it does not believe it was the "systematic cause" of the booms and consequent busts across the world economy.

"However, there were warning signs ahead of the current crisis that monetary policymakers could have heeded."

It said central banks had fulfilled their mandates in that inflation in advanced economies stayed within a narrow range in the lead-up to the crisis.

"But central banks accommodated the relaxation in financial conditions, raising the risk of a damaging bust."

It says central banks should take a broader approach to monetary policy with expanded mandates and possibly "new sets of policy tools".

"Policy makers will need to employ judgment to look at what is driving asset price movements and discretion to avoid costly policy mistakes.

"Crucially, expectations will need to be realistic, as it is inherently difficult to distinguish between unsustainable and sustainable asset price movements."

- AAP