A leading global financial organisation – the International Monetary Fund (IMF) – has warned inflation (rising prices) and interest rates could remain high in the months ahead.
The IMF’s latest outlook found ongoing global cost of living challenges mean interest rates are not likely to come down over coming months.
Treasurer Jim Chalmers said that Australia is “not immune” to the pressure of “uncertainty in the global economy.”
The IMF
The IMF is an international institution focused on economic growth and stability. It loans money to countries in debt, often in exchange for economic policy changes.
Even for countries like Australia which do not require IMF loans, the organisation provides regular policy advice aimed at improving prosperity.
The IMF examines economic growth, challenges and predictions across every continent. These findings are published monthly in the IMF’s World Economic Outlook.
July outlook
The latest IMF outlook found global economies were growing “in line” with its forecast 3.2% increase for 2024.
However, it warned the the rising price of services (e.g. healthcare, education, hospitality) and persistent inflation means “higher-for-even-longer interest rates”.
The report also noted “escalating trade tensions and increased policy uncertainty” risked further instability.
Interest rates
Central banks are national bodies which set a country’s interest rates.
IMF chief economist Pierre Olivier-Gourinchas urged central banks to avoid a “premature easing” of interest rates while inflation remains high due to increased demand for goods and services.
“Unless goods inflation declines further, pressure on services prices and wages may keep overall inflation higher than desired,” Olivier-Gourinchas said.
Uncertainties
A record number of elections are being held this year. The IMF said changes of government can impact economic policy and create unpredictability.
The report also warned against a trend of protectionism — countries boosting local industries and capabilities to avoid relying on overseas trade.
The Federal Government’s “Future Made in Australia” draft legislation is designed to boost local clean energy infrastructure like solar panels and wind turbines. Currently, Australia is heavily reliant on China for these resources and materials.
Australia
Inflation in Australia increased slightly to 4% in the year to May. Last month, the Reserve Bank of Australia (RBA) said it would “do what is necessary” to return inflation to its target range of 2-3%.
This could include increasing the cash rate (currently 4.35%). This figure influences the cost of borrowing across the economy and is also referred to as “interest rates”.
The RBA has raised the cash rate regularly over the last two years to fight rising prices (inflation) by curbing spending. At the start of 2022, the cash rate was 0.10%.
Response
In responding to the data, Treasurer Jim Chalmers said the IMF report is a “reminder that inflation is lingering”.
Additionally, he said that “uncertainty in the global economy in areas like international trade are contributing to inflationary pressures”.
Chalmers conceded “inflation is still higher than we would like”. However, he pointed to inflation reduction and cost-of-living initiatives like the Government’s tax reforms.
Shadow Treasurer Angus Taylor told TDA the Government’s handling of the economy has resulted in “higher interest rates and higher taxes for longer”.
