International Monetary Fund urges RBA to keep lifting interest rates

After the most aggressive series of interest rate hikes in history, the Reserve Bank is now facing calls from a top global body to double down. Here’s what it means.

Australian households are staring down the barrel of another painful round of interest rate rises, with the International Monetary Fund telling the Reserve Bank it needs to push harder to bring inflation under control.

And if state and federal governments do not slow the implementation of taxpayer-funded projects, the global financial institution has warned rates will have to go even higher, adding to the burden on homeowners.

In a report on the health of Australia’s economy, the IMF also called for sweeping policy reforms including lower income taxes, a higher GST rate to help state governments replace stamp duty with annual property taxes, and an economy-wide carbon price.

Reserve Bank Governor Michele Bullock has acknowledged the central bank “might need to go again” on interest rates – potentially as soon as its meeting on the day of the Melbourne Cup – as inflation has remained higher than expected since the last increase in June.

Reserve Bank of Australia Governor Michele Bullock. Picture: Martin Ollman (NCA NewsWire)

The IMF, in the report released on Wednesday, cautioned that inflation remained “sticky” and was falling too slowly.

“More is needed to bring inflation back to target,” the report said, recommending the Reserve Bank resume what was the most aggressive period of rate hikes in its history.

If state and federal governments did not simultaneously implement publicly funded projects at “a more measured and co-ordinated pace”, the IMF said this could add to inflationary pressures and require interest rates “to be even higher”.

The IMF said that while Australia’s economy had been generally resilient, that would be tested next year as growth slowed to 1.2 per cent, demand from China softened, escalating conflicts unfolded overseas, and energy and food prices could potentially spike again.

It made a series of recommendations for governments to reduce structural budget deficits – including controlling spending growth on health, aged care and the National Disability Insurance Scheme at a federal level – and improve flagging productivity.

The IMF encouraged “comprehensive tax reforms, including rebalancing from high direct taxes to under-utilised direct taxes”, with support for vulnerable households impacted by such an overhaul. In particular, it backed replacing stamp duty with annual property taxes – potentially funded by a higher GST – to improve housing affordability.

“Notwithstanding the housing price correction in 2022, 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,” the report said.

The IMF said the federal government also needed to consider overhauling how GST revenue was divided between the states to “address the differential impacts of the pandemic on fiscal sustainability”, with Victoria’s debt burden expected to soar to $171bn in 2027.

Other recommendations included addressing falling education scores, cracking down on foreign bribery, and reconsidering potentially ineffective tax incentives for electric vehicles.

Originally published as International Monetary Fund urges RBA to keep lifting interest rates