IMF urges RBA to raise rates further to curb inflation

The news: The International Monetary Fund has warned more needs to be done to curb inflation and stabilise Australia's economy, as expectations of a rate hike next Tuesday increase. In a statement, IMF staff said continued coordination between fiscal and monetary policy was crucial to a soft landing, while structural policies should focus on productivity growth, the green transition, promoting competition and innovation, as well as tax and labour market reforms.

The numbers: Annual GDP growth slowed to 2.1% in June figures, down from 3.7% YoY in 2022, with elevated net migration, resilient private investment, and strong public investment in transport, health, education and national defence the main drivers of Australia's growth, the IMF said. Headline inflation was at 5.4% in the 12 months to the September quarter, down from the 7.8% peak in late 2022 but well above the Reserve Bank's target 2%-3% range. Bloomberg reports money markets are pricing a 70% likelihood the RBA will increase the cash rate next Tuesday to 4.35%, which would be a 12-year high.

The context: Despite the IMF's rate-hike recommendation, Bloomberg reports a significant proportion of Australia's inflation is driven by climate change, geopolitical shocks and government policies — factors generally outside the RBA's control. House prices, rents, fuel and insurance costs drove 44% of price increases last quarter, despite only making up 16% of the consumer price index (CPI) basket.

What they said: "Although inflation is gradually declining, it remains significantly above the RBA’s target and output remains above potential," IMF staff wrote in the report.