The Reserve Bank has been urged to lift interest rates and governments warned to pull back on infrastructure projects to reduce inflation.
In its annual economic health check, the International Monetary Fund concluded Australia’s economy was “resilient” but “sticky” inflation was a cause for concern.
“Although inflation is gradually declining, it remains significantly above the RBA’s target and output remains above potential,” it said.
“Staff therefore recommend further monetary policy tightening to ensure that inflation comes back to the target range by 2025 and minimise the risk of de-anchoring inflation expectations.”
The central bank board will meet next Tuesday to consider increasing the cash rate. Economists have tipped the board will lift the rate to 4.35 per cent in the wake of firmer than expected inflation data.
Annual headline inflation fell to 5.4 per cent in September, down from 6 per cent in June, but quarterly inflation accelerated 1.2 per cent in the three-month period.
The IMF gave a tick of approval to the government’s decision to bank the extra tax revenue from high commodity prices that helped deliver the first budget surplus in 15 years.
But it said both state and federal governments should wind back infrastructure projects in order to stop mortgage holders being burdened in the inflation fight.
“The Commonwealth government and state and territory governments should implement public investment projects at a more measured and co-ordinated pace, given supply constraints, to alleviate inflationary pressures and support the RBA’s disinflation efforts,” the fund said.
“Otherwise, interest rates would have to be even higher, putting the burden of adjustment disproportionately on mortgage holders.”
The federal government is reviewing its major infrastructure projects.
More to come