The IMF backs high RBA interest rates and warns another hike could be needed if the inflation fight falters

The International Monetary Fund has backed the Reserve Bank's tight monetary policy – although warning interest rates may have to be raised again if the fight against inflation falters.

A report released on Thursday following IMF staff's visit to Australia said the economy was resilient but faced challenges, including significant risks from abroad.

“Growth has slowed; While inflation is moving away from its peak, it remains high as imbalances between supply and demand persist, particularly in sectors such as rentals, new housing and insurance,” the report said.

A “modest” recovery is forecast next year, lifting growth from 1.2% in 2024 to 2.1% in 2025, characterized by improving real incomes and robust labor markets. But growth “will remain below its potential rate until 2026, when it is expected to approach 2.3%.”

“Short-term measures should continue to focus on reducing inflation while supporting economic growth,” the IMF says.

The Reserve Bank’s “continued restrictive monetary policy stance to combat persistent inflation is appropriate.”

Underlying inflation is expected to return sustainably to the RBA's 2-3% target range by the end of next year, “with underlying price pressures slow to ease.”

“Should disinflation stall, measures may need to be further tightened while maintaining targeted support to vulnerable households in the face of rising living costs,” the report said.

It notes that “underlying price pressures remain high” and points to rents, new housing and insurance.

“As the acute demand and supply imbalances in the property market begin to ease, national property prices have exceeded pandemic-era highs and the momentum continues, with rents also rising significantly.”

“Addressing housing affordability challenges requires a holistic approach to addressing the ongoing supply deficit.”

The IMF emphasizes the need to increase productivity with increased competition and innovation. AI technology should be used “responsibly” and climate change should be managed strategically.

“Efforts to revive Australia’s productivity growth, including through competition policy, should be a priority and focus on reforms across capital and labor markets.”

The IMF welcomes the second consecutive surplus for 2023-24, announced this week.

She also supports the Reserve Bank's proposed new monetary policy committee, which has so far been stalled due to a lack of parliamentary support. The IMF says the policy is in line with international best practices. It would “strengthen the operational autonomy of central banks and enhance monetary and fiscal policy synergies.”

The IMF advocates tax reforms to promote efficiency and fairness. They should “reduce reliance on direct taxes and high capital costs that hinder growth.”

“Tax relief, including capital gains tax relief and pension relief, could be phased out to create a fairer and more efficient tax system.”

The IMF says coming environmental and demographic changes “will place structural upward pressure on government spending.”

“Spending reforms should therefore aim to improve spending efficiency and sustainability,” the IMF says.

Treasurer Jim Chalmers said the IMF had endorsed the government's economic management.

“The government’s key focus is getting on top of our inflation challenge without ignoring the risks to growth, and the IMF has supported this strategy.”