By Rachel Mealey: If you’re already hurting from the pressure of high interest rates and bigger mortgage repayments, the outlook for interest rate cuts is looking more grim. The International Monetary Fund has warned that the battle to tame inflation is far from over, and that central banks, like Australia’s Reserve Bank, might need to keep rates higher for longer. For more, I spoke earlier with the ABC’s senior business correspondent, Peter Ryan. Peter, why is the IMF so gloomy, given that there are signs that inflation is cooling?
Peter Ryan: Well, the IMF’s usually a bit gloomy, but there is a little bit of good news. They’re saying that inflation is slowing, it’s just that it’s not slowing fast enough. Here in Australia, for example, the latest monthly inflation reading spiked to 4 per cent, and the Reserve Bank wants it down between 2 and 3 per cent. And in its World Economic Update out overnight, the IMF worries that momentum in the inflation fight is being dragged down, especially with services inflation remaining persistent. Now, we’ll be getting the June quarter consumer price index on the 31st of July, and any higher than expected inflation that reflects that monthly spike could see the Reserve Bank Board deliver what would be the 14th rate rise since May 2022. Speaking in Washington, the IMF’s chief economist, Pierre-Olivier Gourinchas, says rates probably need to stay higher for longer, and that cutting interest rates too early with inflation still high is a risky strategy.
Pierre-Oliver Gourinchas : The bad news is that energy and food price inflation are now almost back to pre-pandemic levels in many countries, unless goods inflation declines further. Pressure on services, prices and wages may keep overall inflation higher than desired. This means that monetary policy must remain vigilant, avoiding a premature easing, but also avoiding excessive delays once inflation is decisively on its way back toward targets.
Rachel Mealey: That’s the IMF’s chief economist, Pierre-Olivier Gourinchas, speaking in Washington, DC. And Peter, the IMF’s also worried about rising protectionism and an explosion of trade tariffs around the world. What’s been said there?
Peter Ryan: Well Rachel, we’ve been seeing a lot of protectionism, I suppose, going back to the wake of the global financial crisis. And this time around, though, the IMF doesn’t specifically mention US-China trade tensions in the context of the US presidential election or Donald Trump’s economic policies, which if elected, he’d be imposing tariffs on China. No mention of Joe Biden’s policies either. But it was pretty clear that the reference was there that these sort of unilateral measures could risk protectionism and slow down global economic reform, such as the climate transition and the uptake of renewable energy sources. That’s the warning anyway from the IMF’s Pierre-Olivier Gourinchas.
Pierre-Oliver Gourinchas : More countries are now going their own way, imposing unilateral tariffs or industrial policy measures. If anything, it will distort trade and resource allocation, spur retaliation, weaken growth, and make it harder to coordinate policies that address global challenges, such as the climate transition.
Rachel Mealey: And Peter, it’s pretty clear Australia’s economy is slow. Does the IMF have anything to say about that?
Peter Ryan: Well, Rachel, the IMF has slightly downgraded Australia’s economic growth to 1.4 per cent this year, down from 1.5 per cent in April. In global terms, steady as she goes, growth of 3.2 per cent in 2024, 3.3 per cent in 2025. But just before we go, money markets only see a 17 per cent chance of a rate hike at the Reserve Bank’s August board meeting. So at this point, rates on hold at 4.35 per cent. But as I mentioned earlier, all eyes are on that quarterly inflation reading at the end of the month in case there’s an inflation spike. There will also be a lot of attention on tomorrow’s official employment reading for June. Whether the jobless rate continues to tick up from the current 4 per cent will be another key factor for the Reserve Bank board to weigh up.
Rachel Mealey: Peter Ryan.
