International Monetary Fund says extra rate hikes “warranted” if inflation persists

A leading financial authority has backed the RBA’s approach to interest rates, but warned further increases would be warranted in the fight against inflation.

More interest rate hikes “would be warranted” and government spending should be reined in if inflation in Australia remains too high, the International Monetary Fund says.

The IMF on Thursday backed the Reserve Bank’s decision to keep the official cash rate at a 13-year high of 4.35 per cent, despite pressure to cut it.

In an annual review of Australia’s economic settings, the United Nations agency said the RBA’s “continued restrictive monetary policy stance aimed at combating persistent inflation is appropriate”.

“Should disinflation stall, policies may need to be further tightened while preserving targeted support to vulnerable households amid rising living costs,” it said.

“Financial sector policies should prioritise preserving stability, while tackling localised vulnerabilities arising from tightened financial conditions.”

It added that stubborn underlying inflation, which isn’t set to hit the target range of 2 to 3 per cent range until late 2025, reaffirmed the “importance of a tight monetary stance until the inflation outlook sustainably aligns with the target range”.

The financial agency also took aim at state and federal government spending on cost-of-living measures and infrastructure, saying they had “proven more expansionary than expected”.

It said lowered spending could “help lower aggregate demand and support a faster return of inflation to target”.

“In particular, infrastructure spending could be carefully prioritised to avoid aggravating construction capacity constraints, by focusing on boosting productivity and facilitating the green transition,” it said.

It said the government’s reformed stage three tax cuts, which began on July 1, could also boost spending, and increase inflation, however the IMF said it “remains too early to assess” its impact.

While the organisation acknowledged inflation has eased from a post-pandemic high of 7.8 per cent in late 2022 to 2.7 per cent, it mirrored comments from RBA governor Michele Bullock that the drop was “in part to sizeable temporary electricity subsidies,” and not a sustainable decrease.

“However, underlying price pressures remain elevated, most notably in non-tradeable sectors like rents, new dwellings, and insurance, reflecting ongoing demand-supply imbalances,” the review said.

The IMF said the budget surpluses, announced by Treasurer Jim Chalmers and Fast week, were welcome but warned against too much government spending. Picture: NewsWire / Martin Ollman

While monthly inflation figures reported inflation had dropped to 2.7 per cent in August, RBA governor Michele Bullock said this would be temporary because of the electricity rebates. Picture: NewsWire/ John Appleyard

Despite this, it welcomed the Albanese government’s consecutive budget surplus, noting it was achieved through spending cuts, while also implementing cost-of-living measures.

In September Ms Bullock said the board wouldn’t move to lowering interest rates until it was convinced inflation was definitely on a downward trajectory.

“The board needs to be confident that inflation is moving sustainably towards the target before any decisions are made about a reduction in interest rates, so we really need to see progress on underlying inflation coming back down toward the target,” she said.

Treasurer Jim Chalmers said the IMF had “endorsed the Albanese government’s responsible economic management,” noting the fund’s comments on back-to-back surpluses.

“Our approach is all about easing the cost of living and fighting inflation at the same time as we lay the foundations for a stronger economy for the future,” he said.

“The IMF – just like the RBA governor – has welcomed our back-to-back surpluses in this report, the first consecutive surpluses in nearly two decades.”

Shadow treasurer Angus Taylor reissued the Coalition’s attack on Labor’s increased spending.

“Labor promised life would be easier. Australians know that life has become much harder over the last two years because of Labor’s bad policies,” he said.

“Today’s IMF statement confirms what the Coalition has said since the election – Labor’s big spending means Australian families are facing higher prices, higher taxes, and higher interest rates for longer.”

Originally published as International Monetary Fund says extra rate hikes “warranted” if inflation persists