Australia's policymakers are facing a complex balancing act
The International Monetary Fund (IMF) has issued a strong directive to Australia, calling for more aggressive monetary policy measures to tackle the country’s persistent inflation issues. In the IMF’s latest staff report, it noted that “while inflation has come off a peak, it remains well above the central bank’s 2 to 3% target.” This situation persists even as the economy shows resilience against the backdrop of a 4% increase in interest rates since May 2022.
The report arrives at a critical juncture, just ahead of the Reserve Bank of Australia’s (RBA) policy meeting on November 7. The RBA is expected to raise the cash rate by 25 basis points, which would mark a 12-year high of 4.35%. The decision comes in the context of Australia’s substantial household debt, which is “among the highest in the developed world” at 186.7% of income.
It is against this backdrop of economic vulnerability that the IMF is emphasizing the need for a more robust policy response.
In particular, the IMF highlighted the necessity for a tighter monetary stance to maintain stability: “Staff therefore recommend further monetary policy tightening to ensure that inflation comes back to the target range by 2025 and minimize the risk of de-anchoring inflation expectations.”
Also read: IMF warns about Australia’s economic outlook
The IMF’s advice also extends to Australian governments at various levels, suggesting a “more measured and coordinated” approach to public investment projects. The report warns that failure to do so could necessitate even higher interest rates, which will negatively impact mortgage holders. This recommendation is pertinent considering Australia’s high household debt, which is one of the highest among developed nations at 186.7% of income.
Despite these challenges, Australian households appear to be weathering the storm of rising borrowing costs. Recent data indicates a 0.9% increase in retail sales in September, significantly surpassing economists’ predictions. In addition, the employment market remains strong, with unemployment rates ranging between 3.4% and 3.7% since June of the previous year.
Ultimately, the IMF’s call for increased monetary tightening is not just about controlling inflation, but also about ensuring a balanced approach among Australia’s policymakers.
“Continued coordination between fiscal and monetary policy is key to achieving a soft landing, while alleviating the impact of policy tightening on vulnerable households,” it noted in the report.
