INTEREST rates will have to rise further if the dip in inflation late last year is not sustained, the International Monetary Fund has warned.
In its twice-yearly global economic outlook, the IMF has sliced Australia's growth prospects but held its forecast that the world economy will grow by 4.9 per cent this year and next.
The onset of drought is expected to result in Australian economic growth of only 2.6 per cent this year, compared with an estimated 3.5 per cent made in September last year. The IMF expects growth to recover to 3.3 per cent next year.
The IMF says there is less chance of a world slump now than there was six months ago, because some of the heat has come out of the oil market and inflation has fallen in most nations.
All eyes on inflation
However, the IMF expects inflation in Australia to remain perilously close to the top of the Reserve Bank's target 2-3 per cent band throughout next year.
Inflation should drop from the oil-pressured 3.5 per cent last year to 2.8 per cent this year but lift to 2.9 per cent next year.
"If inflation does not decline as expected, central banks may still need to tighten monetary policy further,'' the IMF said.
The IMF's major concern on inflation was that there could be another oil-price spiral. It noted that options markets put the chance of the oil price rising from its present level of about $US60 a barrel to $US88 a barrel by the end of the year as one in six.
First-quarter inflation data will be released on April 24 and analysts say the data wil be key to the RBA's next move on interest rates.
The IMF's view that the world economy is likely to ride out the slowdown in US housing markets is likely to influence the Reserve Bank's view on inflation.
Housing rebound
New Australian housing-finance figures show that surging demand for investment housing pushed the total value of housing loans in February up by 3.3 per cent to a record $20.9 billion.
Loans to investors soared by 8.9 per cent to $6.6 billion, only slightly below the level at the peak of the housing boom in 2003.
The growth in housing credit adds to a number of indicators that growth may be more rapid than the IMF or the Reserve Bank has been predicting, including in business confidence and retail sales.
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