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The world bank has warned the Reserve Bank of Australia must continue to “raise interest rates” to rebalance domestic demand and keep inflation anchored.
Following the IMF’s visit to Australia, as part of its regular members’ economic and financial policies monitoring agreement, the world bank said although Australia was likely to avoid recession, it reported housing prices were on track to fall “significantly”.
Australia has been among the strongest economies since the depth of the pandemic, however, growth is expected to slow to about 1.7 per cent in 2023, the report said.
“There are significant downside risks… including a more pronounced global growth slowdown, more persistent inflationary pressures, and an acceleration of the ongoing housing price decline,” the IMF staff reported.
House prices in Australia have fallen from their ‘pandemic-peak’ but remain up year-on-year.
Given declining house prices and Australia’s inflation at 7.3 per cent, marginally below world inflation at 7.4 per cent, the world bank said monetary and fiscal policy tightening was needed.
“The RBA should continue to raise interest rates and fiscal policy should support it in moderating domestic demand growth through judicious budget execution and saving of any revenue overperformance,” the IMF said.
“Fiscal support to address cost-of-living pressures should be temporary and well-targeted to help those in need, so that broader demand stimulus is avoided.”
Amid rising interest rates, high inflation, and increasing housing supply, it added, housing market policies should help address affordability concerns and structural reforms can help reverse the labor productivity slowdown.
“Affordability concerns are increasing given strongly rising rents and lower borrowing capacity amid much higher mortgage rates,” the IMF said.
“A strong focus on boosting housing supply remains essential, supported by well-targeted support for lower-income households.”
It comes as Australia’s cash rate hit 2.85 per cent in November, on the back of seven consecutive hikes, with the Reserve Bank board noting households’ budgets are under pressure.
The world bank noted, despite falling housing prices and rising interest rates, Australia’s financial stability appeared “contained”, but close monitoring was needed.
“Declining housing prices and higher interest rates are not expected to pose material stability risks, though some increase in non-performing loans appears likely, especially among lower-income, highly indebted households with recent mortgages,” the IMF said.
Welcoming the Australian Prudential Regulation Authority’s (APRA) increase in the banks’ required capital buffers in 2023, it added “close scrutiny of non-bank financial institutions” was important given their rapid growth, albeit from a low base.
In addition, it praised the government’s climate mitigation targets stating it should continue to “seize opportunities”, however, raised concerns with constraints in the construction sector and urged the government to “reprioritise”.
“The government should continue to reprioritise and streamline the ambitious infrastructure pipeline, while working proactively with the construction industry to alleviate capacity constraints,” the IMF said.
Supporting greater innovation, building digital infrastructure and skills, and reducing the regulatory burden on business can help boost potential output.
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