Reserve Bank of Australia Faces Pressure to Raise Interest Rates

The International Monetary Fund (IMF) and market economists are urging the Reserve Bank of Australia (RBA) to increase interest rates to counteract stubborn inflation rates and escalating home prices. The pressure comes despite substantial monetary policy adjustments and fiscal consolidation by the RBA in recent times.

The IMF’s mission chief, Abdoul Wane, has advised the RBA to continue raising interest rates from the current 4.1%, warning that further hikes may be necessary if the Albanese government fails to postpone multibillion-dollar infrastructure projects. The IMF believes that Australia’s economy is operating “above capacity”, with persistent inflation, low unemployment, and rising house prices.

New RBA Governor Michele Bullock has indicated a possible 13th rate hike if inflation doesn’t decrease quickly enough, potentially elevating the cash rate to 4.35%. However, she remained undecided based on last week’s data that showed inflation surpassing RBA’s target.

The IMF also highlighted that governments should participate in reducing inflation through coordinated monetary and fiscal policies and a moderated pace of public investment projects. Without such initiatives, it warned that interest rates might need to rise even further, disproportionately burdening mortgage holders as mortgage payments have doubled due to higher interest rates.

The IMF pinpointed low housing supply as an economic concern, with prices starting to increase again leading to an affordability challenge in housing and rapid increase in rents. Australian Bureau of Statistics data revealed new home approvals dropped 4.6% in September, exacerbating the issue.

The IMF predicts a delay in Australia’s inflation reaching the 3% target until early 2026, beyond the Reserve Bank’s late-2025 target. Wane emphasizes the risk of high and persistent inflation and supports higher interest rates to reduce inflation faster and minimize the risk of de-anchoring inflation expectations.

In its report, the IMF also called for Australia to bolster efforts towards climate change mitigation, including reintroducing a carbon tax and implementing an economy-wide carbon price for achieving net zero emissions, ensuring the integrity of carbon offsets under the federal government’s safeguard mechanism.

In contrast, the Central Bank of Azerbaijan (CBA) anticipates annual inflation to stay within the target range through this year and into 2024, due to bolstered restraining factors and stable inflationary expectations. The CBA has decreased the discount rate as part of its monetary policy adjustments. It projects inflation rates of 4.3%, 5.3%, and 3.4% for 2023, 2024, and 2025 respectively, influencing its future monetary policy choices. If no significant threats emerge from both external and internal environments, a progressive easing of monetary policy will be considered. Following the CBA Board’s decision, the discount rate has been reduced from 9% to 8.5% and the interest rate corridor adjusted, with these changes effective from November 2, 2023.

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