It said gross domestic product growth was projected to reach 3% in 2010 and 3.5% next year. Staff assessments estimated that the Australian dollar may be overvalued by somewhere between 5 to 15%.

It said inflation was projected to remain close to the top of the 2 to 3% target band and noted authorities agreed in discussions that if further inflation pressures emerged, they will need to raise rates further.

The IMF said private investment in mining and commodity exports had overtaken public demand as the main driver of growth in Australia. The mining boom was likely to be long lasting, it said, given demand by for commodities from fast-growing Asian economies.

The IMF said the authorities agreed in discussions that the commodities boom will test the economy's capacity and fiscal policy had so far played a key role in managing the boom.

The IMF said it approved of the pace at which the central bank was unwinding monetary stimulus.

The IMF said that "If the recovery and economic growth remain on track and downside risks dissipate, monetary policy might need to tighten further to contain inflation pressures. Should the global recovery stall, the (central bank) has scope to cut the policy rate.”

The Reserve Bank of Australia has raised the policy rate to 4.5% in six steps, the most recent in May. The fund said it also supported government plans to return to a budget surplus of 0.2% of GDP by 2012/13. It noted that a larger surplus than in the past may help avoid potential overheating and offer protection from sharp falls in commodity prices.

The IMF said a fall in prices for houses, which could be somewhat overvalued, according to staff assessments, could affect private consumption and slow the recovery in Australia.

(Sourced from Reuters)