Australia’s Rate Risk Rises as House Prices Surge, IMF Weighs In – Reuters

SYDNEY (Reuters) – The likelihood of an imminent increase in Australian interest rates increased on Wednesday after data indicated that house prices have bounced back to nearly record levels. This shift comes as the International Monetary Fund advised the country to tighten both monetary and fiscal policies to combat inflation.

Market reactions now reflect a nearly 70% probability that the Reserve Bank of Australia (RBA) will raise rates by a quarter point to 4.35% during its meeting on November 7, signaling an end to a four-month pause in rate adjustments.

High inflation and consumer spending figures have already suggested that monetary policy may be overly accommodative. This sentiment was bolstered by a CoreLogic report revealing that house prices have fully recovered from declines experienced during the RBA’s previous series of 12 rate increases.

"The rebound in property prices has been remarkable," commented Gareth Aird, head of Australian economics at CBA. "The RBA’s implementation of 400 basis points of tightening reduced home borrower capacity by 30%, yet property prices are now back to their previous peaks."

So far in 2023, property values in major cities like Sydney, Perth, and Brisbane have risen by more than 10%, increasing household wealth at a time when the RBA is keen to discourage excessive spending.

A separate analysis by PropTrack predicted further increases ahead, driven by strong migration numbers, a tight rental market, and a supply shortage due to home construction struggling to keep pace with population growth.

IMF Recommendation

On the same day, the IMF issued a statement emphasizing the need for stricter monetary and fiscal policies to steer inflation back towards the RBA’s target range of 2-3%.

In its routine assessment of Australia, the IMF noted the continuing strength of the economy, highlighted by an unemployment rate hovering near a 50-year low of 3.6% and economic output estimated to be running 1% above potential.

"Staff therefore recommend further monetary policy tightening to ensure inflation returns to the target range by 2025 and to minimize the risk of destabilizing inflation expectations," the report stated.

The IMF also urged various levels of government to adopt a more cautious approach to infrastructure investments, given that competing large-scale projects are straining limited resources and driving up costs.

According to S&P Global Ratings, capital spending by Australian states and territories is projected to reach a record A$320 billion over the next four years.

"Each project, when considered individually, may not significantly influence national inflation," said Martin Foo, lead analyst at S&P Global Ratings. "However, when all projects are aggregated, they collectively exert a notable impact."