IMF says Australia’s high interest rates are ‘essential’ – and may rise again

Interest rates may need to rise again if Australia’s progress stalls on curbing price rises, according to the International Monetary Fund, as it warns Treasurer Jim Chalmers that government must work in line with the Reserve Bank to bring down inflation.

The top official for Australia at the United Nations’ financial agency, Lamin Leigh, said on Thursday that while inflation had retreated, the “last mile” was proving more protracted than expected.

Treasurer Jim Chalmers has said the IMF’s findings backed the government’s economic managementCredit: Bloomberg

“Should disinflation stall, there may need to be further tightening,” Leigh said, with all policy levers, including government spending, required to work together to curb inflation.

The IMF’s preliminary annual findings into the state of Australia’s economy also called for an overhaul of the tax system, including a re-evaluation of tax concessions to property investors a week after this masthead revealed federal officials had been working on options to scale back negative gearing and capital gains tax concessions.

Chalmers, who has denied government spending is fuelling inflation, said the IMF’s findings backed the government’s economic management, including its back-to-back surpluses.

“The IMF recognises we did this by banking revenue upgrades and restraining spending at the same time as providing cost-of-living relief for people under pressure,” he said.

The IMF said targeted support to vulnerable households was essential. A large item in the most recent federal budget was a $300 energy bill rebate which was given to all households, rather than just those on low incomes.

The findings said the Reserve Bank and government policies had to complement each other to “avoid overburdening any single policy instrument”. Chalmers last month said the RBA’s high interest rate settings were “smashing the economy”, leading to a furious political debate.

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 “near-term” rate cut 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.

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.

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.

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