IMF Sees Inflation Moderation Too Slow, Says RBA Needs To Hike More

The IMF has released its conclusions from its 2023 Article IV Mission on Australia. It recommends further rate hikes to reduce sticky core inflation and reforms to boost productivity growth, which the RBA has noted for some time is too low. The market has over a 70% chance of a 25bp move at the November 7 meeting priced in.

• The IMF is forecasting 2024 growth of 1.25%, resulting in the closure of the output gap, down from 1.8% this year. 2024 is lower than the RBA’s August projections but 2023 higher. The main risks stem from “high and persistent inflation”, climate change and the uncertain global outlook, especially China.
• Inflation is expected to average 4% next year, well above the RBA’s current forecast of around 3.5%. An upward revision of that magnitude would delay the return to target which would require further tightening.
• The IMF observes that the moderation in Australian inflation is slow and that core is sticky and so “more is needed to bring inflation back to target”. In other words, the RBA needs to increase rates more to contain inflation and inflation expectations. The Australian policy rate remains below many other OECD countries.
• Australia needs to implement productivity boosting reforms including in the areas of the digital economy, labour market, tax, innovation and competition. It also suggests supporting green energy.
• See full report here.