The International Monetary Fund has backed the Reserve Bank of Australia to lift interest rates again if required, while calling on Treasurer Jim Chalmers to pursue more ambitious tax reform.
In its latest assessment of Australia’s economy, released on Thursday, the global financial institution said bringing inflation back within the target range should be the nation’s immediate focus as elevated prices continue to erode household living standards.
The IMF said the “soft landing” it had forecast during its previous Australian visit in February had unravelled, with sluggish productivity and the conflict in the Middle East contributing to the changed outlook.
After the RBA’s three interest rate increases so far, the IMF expects Australian economic growth to ease to 1.9 per cent in 2026 before slowing further to 1.6 per cent in 2027.
Surging oil costs, stronger-than-expected inflation data for July and increasingly tough language from senior RBA officials have fuelled predictions that the central bank could mirror the US Federal Reserve with another rate hike at its September meeting.
“Given persistent underlying inflation pressures and large uncertainty around whether financial conditions are sufficiently restrictive, the RBA should stand ready to hike rates as needed,” the IMF said.
It warned that additional increases in energy costs could further accelerate price growth and drive up inflation expectations, potentially strengthening the case for more interest rate rises.
At the same time, the Reserve Bank faces a difficult policy trade-off. The IMF said rate cuts could be considered if economic activity weakened substantially, but only where there was clear evidence inflation was moving back under control.
An IMF report has intensified pressure on Treasurer Jim Chalmers to rein in government spending
Australia’s deteriorating productivity performance has also complicated the inflation fight, with productivity declining over the past four years.
Declining productivity has limited the speed at which the economy can grow without pushing up inflation and has weighed on Australians’ living standards.
The IMF welcomed the federal government’s attempts to improve productivity but called for a ‘more ambitious reform strategy’ to boost competition, reduce over-regulation and rebalance the tax system.
It recommended replacing stamp duty with a recurrent land tax and shifting the tax burden away from income and towards consumption.
The IMF urged federal and state governments to cut back on spending amid rising debt levels, noting the difficulty the government would face in implementing ‘difficult’ NDIS reforms.
READ MORE: Security Footage Shows Burglar Crawling in Soda Fountain Break-In
Changes to property investor tax breaks in the federal budget also got the IMF’s tick of approval for helping to fix the housing market, although the recent fall in house prices was not enough to address affordability.
‘Recent budget measures to support enabling infrastructure, build-to-rent housing, and social and affordable housing are welcome, and recent tax changes should reduce some demand-side distortions,’ the report said.
But the IMF also noted unintended consequences from the reforms, urging the government to minimise compliance costs and the impact on investment.
Australia’s productivity growth has gone backwards over the last four years
HSBC chief economist Paul Bloxham predicts prices will fall 13 per cent from peak to trough.
That should slow economic growth by 0.4 per cent over six months, helping the RBA get inflation back to target, he said.
The treasurer said the IMF’s report backed the government’s budget changes and ongoing focus on productivity.
‘It’s a timely endorsement of our economic strategy at a time of accelerating change and uncertainty in the global economy,’ Dr Chalmers said.
Further efforts to boost supply, such as providing more enabling infrastructure and improving productivity in the construction sector, were also encouraged.
The IMF was optimistic about the impact of the AI and data centre boom on Australia’s economic growth and productivity.
But it could also put pressure on the construction sector and lead to higher electricity costs if new renewable energy projects were not built quickly enough, it said.
Shadow treasurer Tim Wilson said the IMF’s report card showed Labor was worsening inflation through excessive spending, causing Australians to fall further behind.