While the IMF described Australia's economy as "resilient", it also identified "sticky" inflation as a cause for concern. Although inflation is gradually declining, it remains significantly above the RBA's target, and output continues to exceed potential levels.
Based on these findings, the IMF recommended further monetary policy tightening to bring inflation back within the target range by 2025 and minimize the risk of de-anchoring inflation expectations.
The RBA's central bank board is scheduled to meet next Tuesday to discuss the possibility of increasing the cash rate. Economists are predicting a rate hike to 4.35%, driven by stronger-than-expected inflation data.
In September, annual headline inflation fell to 5.4% from June's 6%, but quarterly inflation grew by 1.2% during the three-month period.
The IMF commended the government's decision to allocate the extra tax revenue generated by high commodity prices towards achieving the first budget surplus in 15 years.
However, the IMF also emphasized the need for both federal and state governments to scale back on infrastructure projects to ease the burden on mortgage holders in the fight against inflation.
"Given supply constraints, the Commonwealth government and state and territory governments should implement public investment projects at a more measured and coordinated pace to alleviate inflationary pressures and support the RBA's efforts towards disinflation," the IMF advised.
The fund warned that failure to adjust the pace of infrastructure projects would require even higher interest rates, placing a disproportionate burden on mortgage holders.
As a result of the IMF's recommendations, the federal government is currently reviewing its major infrastructure projects.
Treasurer Jim Chalmers lauded the report as a "glowing endorsement" of the government's management of the economy, stating that it highlighted their effective cost of living plan and responsible economic approach that aids in the fight against inflation.
While Chalmers refrained from commenting on whether the RBA should increase rates at its upcoming meeting, he affirmed that he does not preempt decisions independently made by the Reserve Bank.
Published:Saturday, 4th Nov 2023
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