Key facts
- The IMF warned Australia's central bank may need to hike interest rates further to tame inflation.
- Persistent underlying inflation pressures and uncertainty about sufficiently restrictive financial conditions warrant further tightening by the RBA, the IMF said.
- Further spikes in global energy prices could fuel inflation expectations, necessitating additional tightening.
- Australia's economic growth is expected to slow over the next two years.
- Markets imply an 87% chance the RBA will raise the 4.35% cash rate by 25 basis points when it meets at the end of this month.
- The IMF downgraded Australia's 2027 GDP growth forecast by 0.1 percentage points to 1.6%.
The International Monetary Fund (IMF) has indicated that Australia's central bank might need to implement further interest rate increases to manage persistent inflation. The global lender also revised down its economic growth forecast for Australia in 2027 to 1.6%.
The IMF stated in a release on Thursday that "Given persistent underlying inflation pressures and large uncertainty around whether financial conditions are sufficiently restrictive, the RBA (Reserve Bank of Australia) should stand ready to hike rates as needed." The fund warned that additional increases in global energy prices could exacerbate inflation expectations, potentially requiring further tightening by the RBA, which aims to maintain inflation between 2% and 3%.
Australia's economic expansion is projected to decelerate over the next two years. However, the IMF noted that household spending and business investment could demonstrate greater resilience than anticipated, possibly prolonging elevated inflation. This situation presents a challenge for the RBA, which is balancing inflation control with avoiding a significant economic downturn.
Recent data showed Australian consumer prices rose more than expected in July, partly due to increased fuel costs, with core inflation also surpassing forecasts. Financial markets are currently pricing in an 87% probability that the RBA will increase its 4.35% cash rate by 25 basis points at its upcoming meeting, reaching 4.85% by early 2027.