Tuesday, May 21, 2024
Tuesday, May 21, 2024
Home » Reserve Bank Will Have to Raise Interest Rates Again Because Inflation Still Too High, IMF Says

Reserve Bank Will Have to Raise Interest Rates Again Because Inflation Still Too High, IMF Says

by Finley Hawkins
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The International Monetary Fund says the Reserve Bank will have to increase interest rates again because Australia’s inflation rate on current settings won’t slow to within the 2%-3% target range until early 2026. The IMF’s latest assessment of the health of the economy, released on Wednesday, said that while the inflation rate was declining it “remains too high”, with the rising costs of services remaining “sticky” despite 12 interest rate rises by the RBA so far.

The Washington-based group recommended “further monetary policy tightening” in the form of higher interest rates to ensure inflation returns to the target range by 2025 “and minimise the risk of de-anchoring inflation expectations”. Abdoul Wane, the IMF’s mission chief, declined to say how much higher the RBA’s main interest rate – now at 4.1% – would have to increase. The size of the hikes would “depend on the psychological effects of rate hikes that will not be captured by our models”.

Almost all economists, including those of the big four banks, and financial markets expect the RBA will lift the cash rate to 4.35% at next Tuesday’s board meeting. An increase would end a pause of four months since the central bank last hiked rates, the 12th rate rise since May 2022.

The RBA will base its decision in part on an update of its forecasts, with the full quarterly statement on monetary policy due out on 10 November. The RBA’s August forecast has inflation falling to within the bank’s target range by mid-2025. According to the IMF, however, inflation would only return to the RBA’s target band by the first quarter of 2026. The fund based its estimates on “expectations from the market” but these were “not very far from what the RBA has in mind”.

Guardian Australia approached the RBA for comment. Last week, figures from the Australian Bureau of Statistics showed prices for the September quarter were 5.4% higher than a year earlier, more than economists had predicted. The IMF’s assessment was based on meetings over the past fortnight with the RBA, finance officials in Canberra, banks and others in the private sector. It will release a final report in January.

The fund found Australia’s economy to be “resilient” even as GDP growth was to slow to 1.25% in 2024 – a figure in line with the RBA’s current estimates. The nation’s fiscal deficit had “contracted at a faster pace than in other advanced economies”, with the commonwealth retaining “the majority of improvements” from higher commodities prices rather than spending them.

More could be done though, such as improving the coordination of infrastructure projects to ease price strains. Among the upside risks were “higher migration, faster execution of public investment, and an acceleration of housing price increases that can boost consumer sentiment and household consumption through wealth effects”, the fund said.

More housing supply was needed, Wane said. Data out on Wednesday showed the total number of dwellings approved fell 4.6% in September, in seasonally adjusted terms, reversing part of the 8.1% rise in August, according to ABS data. Australia’s property prices have continued to rise through much of 2023 to record levels or above even with four more RBA rate rises crimping the ability of many people of borrow, two research groups said on Tuesday.

The treasurer, Jim Chalmers, said the IMF had “backed the Albanese government’s responsible budget management and highlighted our targeted policies to address cost-of-living pressures”.

“The independent assessment supports the government’s strategy of banking the majority of revenue upgrades when the inflation challenge is most intense,” Chalmers said.

The IMF said governments would need to cut deficits and promote economic efficiency over the “medium term”, with greater use of “underutilised indirect taxes” one option. It backed property taxes over stamp duty at state level to promote housing affordability and improve the tax base. To address global heating, the IMF backed an economy-wide carbon price or, failing that, “strong sector policies” putting a price signal on carbon.

The Albanese government’s new safeguard mechanism to tackle industry emissions was “an important milestone” but the IMF said it should “consider gradually expanding the coverage of the mechanism to a greater share of the economy” and noted the “integrity of carbon offsets” was key.

The IMF also welcomed the government’s objective of increasing the share of renewable energy in the power grid to 82% by 2030 and its plans to impose fuel efficiency standards. “By contrast, tax incentives for [electric vehicle] purchases are potentially regressive and seem less effective, given supply botlenecks,” it said.

Source: The Guardian

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