IMF issues grim Australia inflation warning, Reserve Bank hints at another interest rate rise in November

The International Monetary Fund has warned Australia will have some of the rich world’s highest inflation this year - hours after the Reserve Bank of Australia hinted it could raise interest rates to an 18-year high at its next meeting in three weeks’ time.

With Australian Government spending at a four-decade high outside COVID, the IMF has also warned that high levels of public spending and debt were unsustainable and adding to demand.

“For countries with above-target inflation or elevated underlying inflationary pressures, fiscal consolidation can moderate demand and complement monetary policy efforts to maintain price stability,” the IMF said on Tuesday in its 124-page World Economic Outlook.

Australia is particularly at risk, with the key 10-year bond yields last month hitting a 15-year high, meaning higher debt interest payments when COVID-era debt matures in 2030 and sovereign borrowing obligations are refinanced, requiring higher annual interest payments.

“Given elevated debt, rising sovereign yields, and pressing spending needs, a renewed focus on rebuilding fiscal space is increasingly urgent,” the IMF said.

“Governments should implement credible fiscal adjustment plans that combine enhancements on the revenue side with spending rationalization, supported by institutional improvements.”

Shadow treasurer Tim Wilson said this was clearly a criticism of Australia, with Commonwealth Government spending making up 26.9 per cent of GDP and the Federal Government only forecasting Budget deficits in coming years with gross debt surpassing $1 trillion.

“This international report card has extraordinarily given the Albanese government two economic ‘F’s’ and warned that if it doesn’t kick its spending addiction, Australians will be expelled from prosperity and risk job losses,” he said.

“The Albanese government keeps pouring debt petrol on the inflation fire, and families and small business are paying the price through rising interest rates and higher prices at the supermarket.”

The IMF has also forecast Australia’s headline inflation level finishing the year at 3.9 per cent, which is significantly higher than the Reserve Bank of Australia’s August forecast of a 2.6 per cent inflation pace by December.

Among advanced economies, few will have higher inflation this year with this dubious club also including Iceland (5.6 per cent), Lithuania (5.4 per cent), Bulgaria (4.9 per cent), Croatia (4.5 per cent), Greece (4.2 per cent), New Zealand (4.1 per cent) and Andorra (4 per cent).

The United States was forecast to have a 3.6 per cent inflation rate, compared with Canada’s 2.8 per cent, the UK’s 3.3 per cent with Australia having even higher inflation than developing nation Mexico’s 3.8 per cent.

The warning was issued shortly after the Reserve Bank’s September meeting minutes blamed domestic factors for keeping underlying inflation elevated.

Despite the Iran war, Australia has a bigger homegrown inflation problem with non-tradables inflation, reflecting domestic price pressure, rising by 4.5 per cent compared with 2.9 per cent for tradables inflation linked to imports in the year to the end of August.

“While the monthly data can be volatile, the staff’s preliminary assessment – based on sub-components of the consumer price index – was that the upward surprise in underlying inflation was more likely to reflect greater domestic capacity pressures than unexpectedly strong pass-through of cost increases flowing from the Middle East conflict,” the minutes said.

“Members concluded by discussing what these developments implied for their judgement about domestic capacity pressures and their impact on the inflation outlook.”

The RBA’s preferred measure of underlying inflation, known as the trimmed mean, has been above its 2-3 per cent target for 13 straight months, growing by an annual pace of 3.6 per cent in August.

The RBA’s nine-member monetary policy board last month unanimously voted to raise the cash rate to a 15-year high of 4.6 per cent, marking the fourth hike this year and the 16th since Labor came to power four years ago.

But more pain is likely again on Melbourne Cup day with inflation in August remaining above the RBA’s 2-3 per cent target for the 13th straight month.

“The board will remain focused on its mandate to deliver price stability and full employment and will continue to do what it considered necessary to achieve that outcome, including increasing the cash rate target further if required,” the minutes of the September 28-29 meeting released on Tuesday said.

Another rate hike on November 3 would take the RBA cash rate to 4.85 per cent, which would be the highest borrowing cost since December 2008 and mark the fifth increase this year.

ANZ head of Australian economics Adam Boyton said the hawkish tone of the RBA minutes suggested another increase next month by vote of the monetary policy board, despite the futures market only rating an increase as a 30 per cent chance.

“We continue to expect that a rate hike in November is more likely than not, although the incoming data and global events will play a large part in shaping the MPB’s views between now and November,” he said.

While unemployment is at a five-year high of 4.6 per cent, the Reserve Bank minutes revealed its own economists were “increasingly questioning whether the rate of unemployment that is consistent with the inflation target was higher than previously assessed”.

Mr Boyton said this suggested the RBA “may be more tolerant of a higher unemployment rate”, with ANZ and Westpac still the only two of the big four banks forecasting a November rate hike.

The Middle East conflict is also adding to inflationary pressures, with headline inflation in August rising to 4 per cent, up from July’s 3.5 per cent level, following Iranian militia-backed drone strikes on Saudi Arabia’s East-West pipeline.

“The risk of a re-escalation of the Middle East conflict had since crystallised. Global energy prices were significantly higher than assumed in August, reflecting ongoing disruptions to shipping, damage to refineries and low inventory levels,” the RBA minutes said.

Capital city motorists are now typically paying $2.40 a litre for unleaded petrol.

The Reserve Bank’s four interest rate rises since February have also diminished the borrowing capacity of prospective homebuyers, with new data from credit check firm Equifax showing a 22.1 per cent plunge in first homebuyer applications, when September 2026 was compared with a year earlier.

This followed a 20.1 per cent annual plunge in August and a 19.2 per cent year-on-year decline in July.