IMF urges higher interest rates to control inflation

The International Monetary Fund has urged Australia’s central bank to keep lifting interest rates to bring inflation down faster.

Consumer price growth remains “well above” the Reserve Bank of Australia’s target range, the global organisation has warned, with services inflation proving sticky as is the case in many advanced economies.

“Staff therefore recommend further monetary policy tightening to ensure that inflation comes back to the target range by 2025 and minimise the risk of de-anchoring inflation expectations,” IMF staff wrote in a statement on Australia’s economy.

Headline inflation lifted 5.4 per cent annually in the September quarter, well below the 7.8 per cent peak in December though far above the central bank’s target range of two-three per cent.

The stronger-than-expected dataset has fuelled expectations of another interest rate hike when the central bank board meets on Tuesday.

The IMF said federal and state governments should help take pressure off inflation by rolling out public investment projects at a “more measured and co-ordinated pace”, given supply constraints.

The Commonwealth’s budget strategy of banking revenue windfalls was commended, though the organisation urged continued coordination between monetary and fiscal policy in the interests of “more equitable burden sharing”.

“Otherwise, interest rates would have to be even higher, putting the burden of adjustment disproportionately on mortgage holders,” the organisation said.

Treasurer Jim Chalmers said the independent assessment of the economy supported his government’s budget strategy, with inflation data released last week showing its cost-of-living policies took half a percentage point off inflation.

“This report welcomes the government’s broader economic agenda, including investments in cheaper and cleaner energy, cheaper childcare, and skills and vocational training, as well as policies to boost housing supply,” he added.

The IMF said Australia’s economy has proved resilient, though growth is forecast to slow or 1.25 per cent in 2024.

There are risks factors that could lead to even weaker growth, but the global organisation was most concerned about the inflationary outlook, including the possibility of households losing faith in prices coming down fast enough, prompting them to start demanding higher wages.

Energy – particularly petrol – and food prices were also identified as risks to the inflation outlook, as well as uncertainty around household consumption patterns and how willing people were to draw down on their saving buffers built up during the pandemic

The IMF also made some longer term recommendations, including focusing on tax reform, productivity growth, and supporting the green transition.


Poppy Johnston
(Australian Associated Press)


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Categories: Finance