Reserve Bank of Australia Faces Pressure to Raise Interest Rates

The International Monetary Fund (IMF) and market economists are calling on the Reserve Bank of Australia (RBA) to raise interest rates in response to ongoing high inflation and increasing home prices. This request comes even after the RBA has made significant changes to its monetary policy and fiscal measures recently.

IMF mission chief Abdoul Wane has recommended that the RBA continue to increase interest rates from the current level of 4.1%. He has cautioned that additional hikes may be necessary if the Albanese government does not delay large infrastructure projects. The IMF assesses that Australia’s economy is running “above capacity,” grappling with persistent inflation, low unemployment rates, and soaring housing costs.

New RBA Governor Michele Bullock has suggested the possibility of a 13th rate hike if inflation remains stubborn, which could raise the cash rate to 4.35%. However, her decision will depend on forthcoming data, especially after last week’s figures showed inflation exceeding the RBA’s target.

The IMF has also pointed out the need for government involvement in addressing inflation through coordinated monetary and fiscal policies, along with a more measured approach to public investment projects. Without these strategies, there is a risk of significant further interest rate increases, placing additional strain on mortgage holders, who are already facing doubled mortgage payments due to higher rates.

Additionally, the IMF noted low housing supply as a key economic issue, with prices beginning to rise again, leading to affordability challenges and rapid rent increases. Australian Bureau of Statistics data reported a 4.6% decline in new home approvals in September, worsening the situation.

The IMF forecasts that Australia will not achieve its inflation target of 3% until early 2026, later than the RBA’s own target of late 2025. Wane has stressed the dangers posed by persistent high inflation and supports raising interest rates to tackle it more quickly and to protect inflation expectations.

In its report, the IMF also urged Australia to enhance climate change mitigation efforts. This includes re-establishing a carbon tax and introducing a carbon price across the economy to meet net-zero emissions goals, while ensuring the integrity of carbon offsets within the federal government’s safeguard mechanism.

In contrast, the Central Bank of Azerbaijan (CBA) expects its annual inflation to remain within the target range through this year and into 2024, thanks to various stabilizing factors and steady inflation expectations. As part of its monetary policy adjustments, the CBA has lowered the discount rate and anticipates inflation rates of 4.3%, 5.3%, and 3.4% for 2023, 2024, and 2025 respectively, which will influence its future monetary policy decisions. If no significant risks arise from external or internal sources, the CBA will consider a gradual easing of its monetary policy. Following the CBA Board’s recent decisions, the discount rate has been reduced from 9% to 8.5%, with these changes taking effect on November 2, 2023.