Bracing for Impact: RBA Signals Another Rate Hike

The International Monetary Fund (IMF) has indicated that the Reserve Bank of Australia (RBA) must raise interest rates again. This is essential to reduce Australia’s inflation to the target range of 2-3% by early 2026.

The IMF released an economic health report on Wednesday. It noted that although inflation is on a downward trend, it remains above the desired level. Service costs continue to rise, despite the RBA implementing 12 rate increases.

The IMF advises the RBA to tighten monetary policy further. By increasing interest rates, they aim to bring inflation back to the target range by 2025. This approach also aims to stabilize inflation expectations.

Abdoul Wane, the IMF’s mission chief, did not specify how much the RBA’s main interest rate, currently at 4.1%, would need to go up. He mentioned that the extent of future hikes would hinge on the rate increases’ psychological impact, which is not quantifiable by their models.

Reserve bank of Australia Rate Hikes

Economist Predictions

Leading economists, including those from the major four banks, alongside financial markets, are anticipating the Reserve Bank of Australia (RBA) to raise the cash rate to 4.35% in the upcoming board meeting next Tuesday. This expected increase would mark the end of a four-month hiatus since the RBA last executed a rate rise, which was the twelfth since May 2022.

 

The RBA’s rate decision will partly reflect its revised projections, with a comprehensive quarterly statement on monetary policy scheduled for release on November 10. The RBA’s forecast in August projected that inflation would drop to the bank’s target range by mid-2025.

 

However, the International Monetary Fund (IMF) projects a more conservative timeline for inflation’s return to the RBA’s target band, anticipating it will happen by the first quarter of 2026. The IMF’s calculations are based on market expectations, which they note align closely with the RBA’s considerations.

Inflation Surges

Recent data from the Australian Bureau of Statistics (ABS) revealed a significant 5.4% inflation rise over the September quarter, surpassing economist forecasts. This comes as the International Monetary Fund (IMF) wraps up its recent assessment based on consultations with the Reserve Bank of Australia (RBA), finance authorities in Canberra, and representatives from banks and the private sector. A detailed report from the IMF is expected in January.

 

Despite the higher-than-expected inflation figures, the IMF regards Australia’s economy as robust. However, it forecasts a deceleration in GDP growth to 1.25% in 2024, which aligns with the RBA’s projections.

 

Australia stands out for its rapidly contracting fiscal deficit, outpacing other advanced economies, and maintaining most gains from elevated commodity prices without significant expenditure.

 

The IMF suggests further improvements could be made, especially in the management of infrastructure projects to alleviate pricing pressures.

 

Positive risks to the economy include increased migration, swift public investment, and a potential rise in housing prices, which could elevate consumer sentiment and spur household spending through perceived increases in wealth.

 

Nevertheless, Abdoul Wane from the IMF pointed out the necessity for more housing supply. This aligns with new ABS figures showing a 4.6% drop in dwelling approvals in September, a partial pullback from the 8.1% increase in August, suggesting challenges in meeting housing demands.