The Reserve Bank’s reluctance to lower interest rates was “appropriate”, the IMF said, as inflation remained elevated, especially in sectors such as rents, new dwellings and insurance.
The RBA has kept interest rates on hold at 4.35 per cent since November last year, and governor Michele Bullock has said a rate cut before Christmas is “not aligned with the board’s current thinking”.
Central banks in the US, UK, Canada and New Zealand have all lowered interest rates, although all except Canada still have a higher cash rate than Australia.
While markets are expecting at least one rate cut before the end of the year, the IMF said current restrictive interest rates were “essential” to extinguish the risks of prolonged inflation. A stronger than expected labour market and “larger fiscal impulses” could tip the country into a higher-inflationary environment, it warned.
The IMF said targeted support to vulnerable households was essential and that the Reserve Bank and government’s policies had to complement each other to “avoid overburdening any single policy instrument”.
While the IMF noted economic activity had been propped up by government spending, it said further spending should be carefully prioritised to avoid adding pressure to the construction sector.
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At the same time, the report said Australia needed to reduce its reliance on direct taxes such as company and personal income tax and re-evaluate concessions for property investors. Despite modelling being done by Treasury officials into negative gearing and capital gains tax changes, the Albanese government has said it is not considering taking those reforms to the next election, but has not expressly ruled out future changes.
While the economy has slowed, the IMF expected real income growth and a resilient jobs market to lead to a “modest economic recovery” next year, pushing economic growth from 1.2 per cent this year to 2.1 per cent in 2025.
The IMF is expecting a modest rise in unemployment to 4.5 per cent in 2025, with inflation returning sustainably to the RBA’s target range of 2 to 3 per cent by the end of next year.
