The International Monetary Fund said the Reserve Bank of Australia should remain prepared to raise interest rates further, citing persistent underlying inflation and uncertainty over whether financial conditions are sufficiently restrictive. The warning reinforces expectations that the current 4.35% cash rate may not mark the peak. Markets assign roughly an 80–87% probability to a 25bp hike on September 29 and price the rate reaching around 4.85% by early 2027.
The IMF identified global energy prices as a major upside risk. A further oil surge could generate stronger second-round effects and lift inflation expectations, requiring additional monetary tightening. That risk is increasingly relevant after Brent climbed above $108 and Australian fuel prices rose sharply. July inflation had already exceeded expectations at both headline and underlying levels, leaving the RBA with limited scope to look through another sustained energy shock.
The policy outlook is complicated by slowing growth. The IMF expects Australian GDP to expand 1.9% in 2026 and lowered its 2027 forecast to 1.6%, partly because of the increased likelihood of higher rates. It also argued that spending restraint by federal and state governments would support disinflation and reduce the burden on monetary policy. The assessment therefore strengthens the near-term hawkish RBA case, although weaker growth limits how far the tightening cycle can ultimately extend.
Key takeaways
- The IMF said the RBA should stand ready to raise rates further, citing persistent underlying inflation and uncertainty over whether financial conditions are sufficiently restrictive.
- The immediate risk comes from energy prices. Further oil increases could produce second-round inflation effects and lift inflation expectations.
- Markets assign roughly an 80–87% probability to a 25bp RBA hike on September 29, which would lift the cash rate from 4.35% to 4.60%.
- The IMF expects Australian growth of 1.9% in 2026 and has lowered its 2027 forecast to 1.6%, highlighting an increasingly difficult inflation-growth trade-off.
- Fiscal restraint could reduce the burden on monetary policy. The IMF argued that slower federal and state spending would support the RBA’s disinflation effort.
- For the Australian Dollar, persistent inflation and elevated hike expectations offer rate support, but that advantage is tempered by weaker growth and exposure to the global energy shock.
