The Organisation for Economic Co-operation and Development (OECD) says Australia must take advantage of its favourable economic position and pursue its carbon reduction policy.
In its latest Economic Outlook, released on Wednesday, the OECD says the Australian economy is set to rebound after the disruptions caused by this summer's natural disasters, in a recovery driven by historically high terms of trade.
The Paris-based institution is forecasting Australian economic growth to accelerate sharply, from 2.9 per cent in 2011 to 4.5 per cent in 2012, and after 2.6 per cent in 2010.
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
"The authorities must take advantage of the favourable economic situation to pursue long-term structural reforms, including those that favour output involving less CO2 emissions," it said.
It welcomed the federal government's latest budget that has continued the process of fiscal consolidation, despite the cost of the rains and flooding to the public accounts.
It said the Australian business climate remained positive despite the disasters, with mining commodity prices at historically high levels, prompting upward revisions to investment plans. RBA GETTING IT RIGHT: OECD
In contrast, confidence among households had declined and they continued to rein in consumption and reduce their debts.
As such, it said the Reserve Bank of Australia's (RBA's) current interest rate policy stance seemed to be "appropriate".
It noted underlying inflation remained moderate at 2.25 per cent in the March quarter, because of easing demand and the appreciation of the Australian dollar.
However, consumer price inflation rose above the RBA's two to three per cent target band to 3.25 per cent due to a rise in fruit and vegetable prices as a result of floods and storms.
"Inflation pressures might emerge because of potential second-round effects of weather disruptions and of oil price hikes, and of the acceleration in growth from the second quarter of this year onward," the OECD said.
It said that while the high terms of trade continue to favour the mining sector, there should be a knock-on effect that results in a gradual firming in private consumption aided by lower unemployment, and higher employment and incomes.
But, it said, a recovery in confidence may favour stronger domestic consumption and demand.
"Should the inflationary pressures ... materialise, the central bank might have to tighten its stance to slow the economy," it said.
However, it warned of downside risks to the economy, saying the rebound in activity after the flooding might be more modest than expected.
"A worsening of international financial conditions, or greater than expected tightening of monetary policy in Asia in response to inflation risks, would have a negative impact on the economy," it said.
