Reserve Bank faces pressure to combat high inflation, IMF calls for rate increase
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Members, pay close attention—major interest rate news is just around the corner.
The Reserve Bank is being advised to raise interest rates, and governments are being cautioned to scale back infrastructure projects to combat high inflation.
During its yearly economic evaluation, the International Monetary Fund expressed concern about Australia's persistent inflation problem.
While inflation is gradually decreasing, it remains higher than the Reserve Bank's target, and the economy is said to be performing above its potential.
To address this issue, the IMF recommended tighter monetary policy, which means increasing interest rates. This measure aims to bring inflation back within the target range by 2025 and prevent long-term inflation expectations from becoming unstable.
Abdoul Wane, the IMF's Mission Chief, didn't specify how much interest rates should rise, as it depends on the psychological impact of rate hikes not captured by models.
However, most economists and financial markets anticipate the Reserve Bank to raise the cash rate to 4.35 per cent at the upcoming board meeting, following 12 previous rate hikes since May 2022.
The Reserve Bank will consider its decision based on updated forecasts, with a full statement on monetary policy expected on November 10th.
While the RBA's August forecast indicates inflation returning to the target range by mid-2025, the IMF predicts it won't happen until the first quarter of 2026, although these estimates are not too far apart.
In September, annual inflation decreased to 5.4 per cent, down from 6 per cent in June, but quarterly inflation increased by 1.2 per cent in the past three months.
The IMF praised the government for saving the extra tax revenue generated by high commodity prices, which resulted in the first budget surplus in 15 years.
However, the IMF also recommended that both state and federal governments should reduce their infrastructure projects to avoid placing an excessive burden on mortgage holders in the fight against inflation.
They advised that public investment projects should be carried out at a more controlled and coordinated pace due to supply limitations. This would help ‘alleviate inflationary pressures’ and support the efforts of the RBA to control inflation.
Failing to do so might require raising interest rates even further, disproportionately affecting mortgage holders.
Treasurer Jim Chalmers praised the government's economic approach, stating that the IMF's report strongly ‘endorses’ it.
‘The IMF makes it abundantly clear that our cost of living plan and our responsible economic management is helping rather than hampering the fight against inflation,’ he said.
‘The government is doing exactly what we need to be doing to take the edge off these inflationary pressures to invest in people in the energy transition and housing at the same time as we get the budget in much better nick.’
However, when asked whether the central bank should raise interest rates next week, Chalmers refrained from commenting, stating, ‘I don’t preempt decisions taken independently by the Reserve Bank.’.
While this inflation news does not mean we have to tighten our belts and wallets soon, it doesn’t hurt to be prepared to fork out more for payments soon. What are your thoughts on this news, folks? Share them in the comments below.
The Reserve Bank is being advised to raise interest rates, and governments are being cautioned to scale back infrastructure projects to combat high inflation.
During its yearly economic evaluation, the International Monetary Fund expressed concern about Australia's persistent inflation problem.
While inflation is gradually decreasing, it remains higher than the Reserve Bank's target, and the economy is said to be performing above its potential.
To address this issue, the IMF recommended tighter monetary policy, which means increasing interest rates. This measure aims to bring inflation back within the target range by 2025 and prevent long-term inflation expectations from becoming unstable.
The IMF’s latest assessment of the health of the economy said that while the inflation rate was declining, it remains ‘too high’. Credit: Shutterstock.
Abdoul Wane, the IMF's Mission Chief, didn't specify how much interest rates should rise, as it depends on the psychological impact of rate hikes not captured by models.
However, most economists and financial markets anticipate the Reserve Bank to raise the cash rate to 4.35 per cent at the upcoming board meeting, following 12 previous rate hikes since May 2022.
The Reserve Bank will consider its decision based on updated forecasts, with a full statement on monetary policy expected on November 10th.
While the RBA's August forecast indicates inflation returning to the target range by mid-2025, the IMF predicts it won't happen until the first quarter of 2026, although these estimates are not too far apart.
In September, annual inflation decreased to 5.4 per cent, down from 6 per cent in June, but quarterly inflation increased by 1.2 per cent in the past three months.
The IMF praised the government for saving the extra tax revenue generated by high commodity prices, which resulted in the first budget surplus in 15 years.
However, the IMF also recommended that both state and federal governments should reduce their infrastructure projects to avoid placing an excessive burden on mortgage holders in the fight against inflation.
They advised that public investment projects should be carried out at a more controlled and coordinated pace due to supply limitations. This would help ‘alleviate inflationary pressures’ and support the efforts of the RBA to control inflation.
Failing to do so might require raising interest rates even further, disproportionately affecting mortgage holders.
Treasurer Jim Chalmers praised the government's economic approach, stating that the IMF's report strongly ‘endorses’ it.
‘The IMF makes it abundantly clear that our cost of living plan and our responsible economic management is helping rather than hampering the fight against inflation,’ he said.
‘The government is doing exactly what we need to be doing to take the edge off these inflationary pressures to invest in people in the energy transition and housing at the same time as we get the budget in much better nick.’
However, when asked whether the central bank should raise interest rates next week, Chalmers refrained from commenting, stating, ‘I don’t preempt decisions taken independently by the Reserve Bank.’.
While this inflation news does not mean we have to tighten our belts and wallets soon, it doesn’t hurt to be prepared to fork out more for payments soon. What are your thoughts on this news, folks? Share them in the comments below.
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