The International Monetary Fund (IMF) says Australia needs even higher interest rates to bring inflation back to target, although hasn’t said how much the cash rate needs to be raised.
In its overview of the Australian economy, the leading global financial body largely painted a positive picture, pointing to strong resilience and high employment, but said inflation remains too high.
“Although inflation is gradually declining, it remains significantly above the RBA’s target and output remains above potential,” the IMF wrote.
“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.”
The IMF added that the RBA shouldn’t be lumped with the sole responsibility of reducing inflation, calling on governments to do their bit too.
“Continued coordination between monetary and fiscal policy is key to securing more equitable burden sharing,” it wrote.
“The Commonwealth government and state and territory governments should implement public investment projects at a more measured and coordinated pace, given supply constraints, to alleviate inflationary pressures and support the RBA’s disinflation efforts.
“Otherwise, interest rates would have to be even higher, putting the burden of adjustment disproportionately on mortgage holders.”
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The IMF also called for a boost to productivity, and improved education to bolster the workforce, and pointed to low housing supply as an issue facing the economy.
“The affordability challenge has not abated, as prices have started increasing again and mortgage payments as a share of disposable income have doubled due to higher interest rates,” it said.
“Rents have also increased at a very fast pace.”
The depth of that challenge was emphasised by data released later this morning by the Australian Bureau of Statistics (ABS) showing new home approvals dropped 4.6 per cent in September, putting them well below long-term averages.
The last point on the IMF report called for Australia to do more to address climate change, even calling for the reintroduction of a carbon tax.
“An economy-wide carbon price would be the most effective way to achieve net zero,” it said, adding that “efforts to ensure the integrity of carbon offsets will be key” to ensure the effectiveness of the federal government’s safeguard mechanism to reduce emissions.
