THE IMF has held up its hands and admitted it got it wrong when calculating the effects of austerity in Ireland.

The organisation said that it completely underestimated how the Irish economy would perform under strict spending rules.

The International Monetary Fund (IMF) said in an academic report that it believed for every €100 of austerity through higher taxes and spending cuts -- this would impact €50 in terms of growth and unemployment.

However, the real effect meant that the austerity cut €90 to €150 out of the system.

The admission is likely to make Finance Minister Michael Noonan's job far more difficult ahead of yet another austerity budget in December.

The IMF said there was an overall drop in incomes due mainly to increases in taxes and austerity measures in Ireland.

This ultimately served to push up poverty levels and squeeze the middle class.

"As the crisis deepened and fiscal consolidation intensified, income inequality started to widen," the IMF said.

"The magnitude of the economic slowdown in Ireland during the crisis inevitably worsened the country's poverty and inequality.

"In the early stage of the crisis, inequality in Ireland fell as upper income groups suffered major income losses.

"However, the impact quickly spilled over to the middle income group, with its large share of construction workers who lost their jobs.

"Ireland's strong social support system has cushioned the impact of the crisis on its at-risk-of-poverty indicators compared to the rest of Europe," it added.

But the IMF said that Ireland is in the midst of a "bumpy" recovery among the deeper recession in Europe.

And in its lengthy report, the group indicated that there should be good news down the line for homeowners.

The IMF said that the European Central Bank (ECB) should keep interest rates low for the foreseeable future and may need to cut them further given the risk of deflation.

The ECB's main lending rate is now at a historic low of 0.75pc.

"The ECB should keep its policy rate low for the foreseeable future or reduce it even further. The ECB should also continue to provide ample liquidity to banks," the IMF said.

The move would be particularly good news for householders on a tracker mortgage rate.

The IMF has anticipated that euro-area inflation will slow to 1.6pc in 2013 "and risks from domestic wages and profits are to the downside."

"The highest policy priority in Europe is to resolve the crisis in the euro area," the IMF said in its World Economic Outlook.

The Washington-based group predicts that the world economy will expand 3.3pc this year, down from the estimate of 3.5pc in July.

clairemurphy@herald.ie