IMF endorses RBA high interest rates and warns a further hike might be needed if the inflation fight stalls

The International Monetary Fund has endorsed the Reserve Bank’s tough monetary policy – while warning rates might need to rise again if the fight against inflation stalls.

A report after IMF staff visited Australia, issued on Thursday, says the economy is resilient but faces challenges, including significant risks from abroad.

“Growth has slowed; while inflation is retreating from its peak, it remains elevated as demand-supply imbalances persist particularly in sectors like rents, new dwellings and insurance,” the report says.

A “modest” recovery is predicted for next year, taking growth from 1.2% in 2024 to 2.1% for 2025, marked by improvement in real incomes and resilient labour markets. But growth “will remain below its potential rate until 2026, when it is forecast to converge to 2.3%”.

“Near-term policies should continue to focus on reducing inflation while nurturing economic growth, ” the IMF says.

The Reserve Bank’s “continued restrictive monetary policy stance aimed at combating persistent inflation is appropriate”.

Underlying inflation is expected to sustainably return to the RBA’s target range of 2-3% at the end of next year, “with underlying price pressures easing only slowly”.

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

It notes “underlying price pressures remain elevated”, pointing to rents, new dwellings, and insurance".

“While acute demand and supply imbalances in the housing market have begun to ease, national house prices have surpassed pandemic-era peaks and the momentum persists, with rents also rising significantly.”

“Addressing the housing affordability challenges requires a holistic approach to tackle the continued supply shortfall.”

The IMF stresses the need for improving productivity, with enhanced competition and innovation. AI technology should be leveraged “responsibly” and the climate transition navigated strategically.

“Efforts to rejuvenate Australia’s productivity growth, including through competition policy, should be prioritised, focusing on reforms across capital and labor markets.”

The IMF welcomes the second consecutive surplus, for 2023-24, announced this week.

It also backs the proposed new Monetary Policy Board for the Reserve Bank, which is so far blocked because of a lack of parliamentary support. The IMF says the policy is in line with international best practices. It would “bolster central bank operational autonomy and enhance monetary-fiscal policy synergies”.

The IMF advocates tax reforms to promote efficiency and fairness. They should reduce “reliance on direct taxes and high capital costs that hinder growth.

"Tax breaks, including from capital gains tax discount and superannuation concessions, could be phased out to generate a more equitable and efficient tax system.”

The IMF says coming environmental and demographic changes “will put structural upwards pressures on government spending.

"Expenditure reforms should therefore aim to enhance spending efficiency and sustainability,” the IMF says.

Treasurer Jim Chalmers said the IMF had endorsed the government’s economic management.

“The government’s primary focus is to get on top of our inflation challenge without ignoring the risks to growth and the IMF has backed this strategy.”