IMF says Australia may need further interest rate rises to tame inflation

The International Monetary Fund (IMF) said on Thursday that Australia’s central bank may need to raise interest rates further, with inflation expected to remain elevated this year before gradually cooling into the central bank’s target band.

“Given persistent underlying inflation pressures and large uncertainty around whether financial conditions are sufficiently restrictive, the RBA (Reserve Bank of Australia) should stand ready to hike rates as needed,” the IMF said in a statement.

The global lender warned that further spikes in global energy prices could fuel inflation expectations, warranting additional tightening by the RBA, which aims to keep inflation within its 2% to 3% target band.

Australia’s economic growth is expected to slow over the next two years, though household spending and business investment could prove more resilient than expected, keeping inflation elevated for longer, the IMF said.

The findings come as Australia’s central bank navigates the challenge of bringing inflation under control without tipping the economy into a sharp downturn, a balancing act that many economies continue to grapple with in the post-pandemic era.

Markets imply an 87% chance the RBA will raise the 4.35% cash rate by 25 basis points when it meets at the end of this month, and reach 4.85% by early 2027.

Australian consumer prices rose more than expected in July as fuel costs jumped, data showed last month, while core inflation also exceeded forecasts, adding to the risk of another hike in interest rates.