The International Monetary Fund (IMF) has commended the Reserve Bank (RBA) on its continued restrictive monetary policy stance, noting that it is necessary to combat persistent inflation, while underlining that fiscal policy needs to support disinflation.
In its most recent report on Australia, the fund said near-term policies should focus on managing the final phase of returning inflation to target while nurturing growth. Inflation, it said, while in retreat from its peak, remains elevated due to ongoing demand-supply imbalances.
Should disinflation stall, the IMF said “expenditure rationalisation at all levels of government could help lower aggregate demand and support a faster return of inflation to target”.
Similarly, while commending the RBA for its “essential” restrictive policy, the fund underscored further tightening could be crucial if inflation resists control.
“This contingent policy mix should ensure monetary and fiscal authorities complement each other to avoid overburdening any single policy instrument,” the IMF said.
The inflation outlook, it said, needed to “sustainably” align with the RBA’s target range before interest rate cuts could be made.
The IMF also issued a friendly tip to the central bank, advising it to further work on improving the strength of its communications.
“While inflation expectations have remained anchored, the RBA should continue to build on its recent efforts and explore ways to further strengthen its communications capabilities and effectively guide the general public’s and the market’s understanding of its data-dependent decision-making process and their expectations regarding policy shifts in an uncertain global policy environment,” the fund said.
This is particularly notable given the RBA’s private meetings with economists and fund managers have been under the microscope recently.
Reform push
The IMF also touched on reforms the Labor government has pursued but which appear to have stalled due to inadequate Senate support.
Among them is the RBA board reform, which would see the bank split into two boards – one for interest rate decisions and another for governance.
Namely, the fund said: “The establishment of a new Monetary Policy Board and strengthened governance arrangements and decision-making processes, in line with international best practices, would bolster central bank operational autonomy and enhance monetary-fiscal policy synergies.”
On tax reforms, the IMF said the government should “target system efficiency and fairness, reducing reliance on direct taxes and high capital costs that hinder growth”.
In particular, the IMF highlighted the need to phase out tax breaks, including capital gains tax discounts and superannuation concessions, to generate “a more equitable and efficient tax system”.
According to the IMF’s projections, Australia will see a modest economic recovery next year, pushing growth from 1.2 per cent for 2024 to 2.1 per cent for 2025, bolstered by real income growth and resilient labour markets.
