IMF urges Reserve Bank to further tighten monetary policy, warns of higher rates

The International Monetary Fund (IMF) has urged Australia’s central bank to keep lifting interest rates to bring inflation down faster.

It warned that rates may have to climb even higher unless governments abandon or delay some of the nation’s multibillion-dollar infrastructure projects.

The IMF’s Washington-based experts have been on a two-week mission to Australia where they have met with the Reserve Bank, Treasury, private sector and academic economists.

They concluded the economy was running “above capacity”, with low unemployment, “sticky” inflation and rising house prices.

Infrastructure rollout

The IMF said the Albanese government’s banking of most of its revenue windfalls from high commodity prices and income tax was helping the Reserve Bank, but federal and state governments should ease back on their infrastructure rollout to better share the inflation-fighting “burden”.

“Deferring some projects could help contain cost pressures and help governments achieve better value for money,” the IMF claimed.

“Mortgage holders should not be forced to bear the brunt of the full costs of adjustment.”

Industry research has shown strong growth in major project investment is expected to continue over the next couple of years.

Large projects by governments and the private sector such as public road, rail and hospital developments are projected to rise to around $70 billion in 2023-24; $80 billion in 2024-25; and $100 billion in 2025-26.

Economic efficiency

The IMF also called for Australia’s governments to reduce structural budget deficits and promote economic efficiency over the medium term.

“All levels of government need to improve expenditure outcomes and contain structural spending growth in health, aged care and the NDIS (national disability insurance scheme),” it said.

Delayed return

The IMF has forecast a delay in Australia’s inflation returning to the 3% target range until early 2026.

This is slightly later than the Reserve Bank’s late-2025 target and slower than other advanced countries.

IMF mission chief to Australia Abdoul Wane said “high and persistent inflation” was a risk and higher interest rates were required to reduce inflation faster.

“Although [Australia’s] inflation is gradually declining, it remains significantly above the Reserve Bank’s target,” he said.

“We are recommending further monetary policy tightening to ensure that inflation comes back to target range by 2025 and minimise the risk of de-anchoring inflation expectations.”

The Reserve Bank’s board is expected to consider increasing the 4.1% cash rate at a meeting next Tuesday.