Australia Rate Hike: The prospect of an interest rate hike Down Under is gaining traction as Australian house prices make a strong comeback, and the International Monetary Fund (IMF) chimes in, advocating for tighter monetary and fiscal measures to tame inflation.
As the Reserve Bank of Australia’s (RBA) upcoming meeting approaches, the odds of a 0.25% rate hike to 4.35% on November 7 are sitting at around 70%. Signs of elevated inflation and consumer spending had already hinted at the need to pull the reins, and the recent CoreLogic report is pouring more fuel on the fire. It reveals that house prices have not only rebounded but returned to their pre-pandemic peaks.
Gareth Aird, CBA’s head of Australian economics, commented on the impressive property price turnaround, even after the RBA’s substantial 400 basis points of tightening, which curbed borrowers’ capacity by 30%. Yet, now property prices are scaling new heights. In 2021, Sydney, Perth, and Brisbane all saw values surge over 10%, boosting household wealth—a situation the RBA would rather see differently in the current economic climate.
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PropTrack’s separate report anticipates further price gains, citing factors like robust migration, a tight rental market, and the construction sector struggling to keep up with population growth.
The IMF has now entered the ring, asserting the necessity for more stringent monetary and fiscal policies to rein in inflation and bring it back within the RBA’s 2-3% target range. In their regular review of Australia, IMF staff underscored the economy’s resilience, with a jobless rate close to a 50-year low and economic output estimated to be running 1% above potential.
The IMF recommends further tightening of monetary policy to ensure inflation aligns with the target range by 2025 and minimize the risk of inflation expectations drifting off course. Additionally, it urges different levels of government to adopt a more measured approach to infrastructure investment, as massive projects are competing for limited resources, driving up costs.
S&P Global Ratings weighs in, estimating that Australian states and territories will collectively spend a record A$320 billion on capital projects over the next four years. While individual projects may not substantially affect national inflation, the cumulative impact of these ventures is undeniably significant.