Interest rates will need to remain high until at least 2024 to deal with ongoing elevated inflation across Australia with warnings households could be financially hammered by another spike in petrol and energy prices.
While financial markets expect the Reserve Bank to consider an interest rate cut in the second half of the year, the Paris-based Organisation for Economic Cooperation and Development overnight warned rate rises were still needed to deal with Australia’s inflation pressures.
Interest rates will need to remain high through 2024, the OECD says, expecting the cash rate to peak at 4.1 per centCredit:Louie Douvis
In its interim economic outlook, the OECD downgraded its forecasts for Australian economic growth. It now expects the economy to expand by 1.8 per cent this year and by 1.5 per cent in 2024. Both forecasts are 0.1 percentage points lower than what the OECD was expecting in November.
Despite the slower growth, the OECD believes inflation in Australia will be higher for longer. It is forecasting inflation this year to average 5 per cent, a 0.5 percentage point increase on its November forecasts, with prices to climb another 2.8 per cent in 2024.
Forecasts for Australia’s core inflation, which attempt to strip out one-off increases in prices, have also been upwardly revised to 5.1 per cent this year and 2.8 per cent next year.
The OECD, which expects the cash rate in Australia to peak at 4.1 per cent, said core inflation was likely to remain high due to the tightness of job markets across the globe.
Even though the economic outlook was fragile, the organisation said central banks would have to keep lifting interest rates to bring inflation under control.
“Monetary policy needs to remain restrictive until there are clear signs that underlying inflationary pressures are lowered durably. Further, interest rate increases are still needed in many economies,” it said.
“With core inflation receding slowly, policy rates are likely to remain high until well into 2024.”
The OECD said there was a risk that oil and energy prices, which have stabilised over recent months after a surge following the start of the war in Ukraine, could again lift and add to inflation pressures.
Overnight, the European Central Bank lifted official interest rates another half percentage point despite concerns about key banks in both Switzerland and the United States which have weighed on equity markets.
In Australia, financial markets now believe the Reserve Bank, which next meets on April 4, will hold interest rates despite strong jobs figures this week confirming ongoing demand for workers across the economy.
A week ago, the same markets had priced in the cash rate reaching 4.1 per cent by August.
The RBA has lifted official interest rates by a combined 3.5 per cent since May last year with the cash rate now at an 11-year high of 3.6 per cent.
Westpac chief economist Bill Evans on Friday said the volatility caused by the banking issues in the northern hemisphere meant the Reserve Bank was likely to hold rates at its April meeting and deliver just one more rate increase this year.
Westpac chief economist Bill Evans believes the RBA will hold rates steady at its April meeting.
“Despite the better than anticipated employment report, we expect the risks around financial market developments and the evidence of the soft data since the February board meeting will prompt the RBA to use its ‘pause option’ in April,” he said.
“Even if the markets settle by the time of the RBA’s April board meeting there will be sufficient uncertainty for a prudent board that was already clearly open to a pause to take that option.”
Treasurer Jim Chalmers said the report confirmed the large number of risks facing the local and global economies.
“We are not immune from the ongoing international volatility, but our own economy and financial systems are well placed in the face of these challenges,” he said.
“While we have a lot coming at us, we’ve got a lot going for us here at home: unemployment at historic lows, good prices for our exports, and the beginnings of wages growth.”
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