Reserve Bank of Australia almost certain to raise interest rates after IMF sounds alarm on inflation

Living costs working-age borrowers are increasing at a higher rate than any other, fuelled by a 9.3% growth in mortgage interest charges

As the International Monetary Fund (IMF) urges the Reserve Bank of Australia (RBA) to further tighten monetary policy to rein in runaway inflation, Australian households already struggling with soaring living costs are bracing for impact.

The IMF’s stern warning comes just days before the RBA board convenes on Melbourne Cup Day to decide whether to raise interest rates again.

Surging Inflation Raises Concerns

Headline inflation has increased by 5.4% annually in the September quarter, far exceeding the central bank’s target range of 2-3%. While this rate is an improvement from the peak of 7.8% in December, the IMF cautions that consumer price growth remains “well above” the central bank’s comfort zone, largely driven by sticky services inflation.

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The global body recommends “further monetary policy tightening” to ensure inflation returns to the target range by 2025 and warns against the risk of “de-anchoring inflation expectations.”

The Burden on Mortgage Holders

A major concern arising from this inflationary trend is the disproportionate burden falling on working-age borrowers.

According to the Australian Bureau of Statistics, living costs for this cohort are increasing at a higher rate than any other, fueled by a 9.3% growth in mortgage interest charges in the September quarter. This follows a 9.8% increase in the previous quarter, driven by the expiration of fixed-rate loans.

Fiscal and Monetary Policy Must Align

While Treasurer Jim Chalmers claims the IMF’s independent assessment supports his government’s budget strategy, the IMF argues for more “equitable burden sharing” through coordinated fiscal and monetary policy.

The organisation suggests that federal and state governments could ease inflationary pressures by rolling out public investment projects at a “more measured and coordinated pace,” given existing supply constraints.

The Risks Ahead

Australia’s economy has shown resilience, but the IMF forecasts a slowdown in growth to 1.25% by 2024, compounded by potential downside risks like a prolonged slowdown in China.

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IMF is also concerned about upside risks, including higher migration, faster public investment, and rising housing prices encouraging household spending.

A Balancing Act

The situation puts the RBA in a delicate position. Tightening monetary policy too aggressively could stifle economic growth and disproportionately affect mortgage holders, while failing to act might result in uncontrollable inflation.

As households, businesses, and policymakers await the RBA’s next move, the IMF’s recommendations serve as a stark reminder of the balancing act required to keep Australia’s economy on an even keel.

Long-Term Vision

While the focus is on immediate concerns, the IMF also advises Australian authorities to contemplate longer-term economic policies. These include tax reforms, productivity growth, and support for the green transition, suggesting that a multi-pronged approach will be crucial for sustainable economic stability.

As the RBA board prepares to meet, the eyes of the nation are fixed on what could be a defining moment for Australia’s economic trajectory. The hope is that any decisions made will not only address the immediate concerns but also provide a foundation for a stable and equitable economic future.

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