Organisation for Economic Co-operation and Development urges Reserve Bank of Australia to not cut interest rates

The Organization for Economic Co-operation and Development has urged the Reserve Bank to keep interest rates high for longer to help curb inflation.

In its latest Economic Outlook, published on Thursday evening, the Paris-based think tank, led by former Australian Federal Finance Minister Mathias Cormann, called for measures to ease inflationary pressures, reduce Australia’s structural deficit and to support bloodless productivity growth.

Although the OECD expects inflation, currently at 3.6 percent, to continue to decline, it expects prices for some services to remain high, requiring a postponement of interest rate cuts.

The report predicts three rate cuts between the September quarter and the end of 2025.

“Monetary policy should remain restrictive in the short term to curb inflation,” the OECD report said.

However, should the economy prove more resilient and services inflation remain persistent, the OECD warned that Australia’s central bank could also be forced to resume its aggressive series of rate hikes.

“A downside risk to economic growth is that taming persistent inflation in the services sector may require tighter monetary policy than currently assumed,” the report said.

According to OECD forecasts, Australia’s real GDP growth will slow to 1.5 percent through 2024, before recovering to 2.2 percent in 2025, as the impact of the RBA’s aggressive rate hikes on household consumption and business activity negatively affects.

At the same time, the unemployment rate is expected to rise to 4.3 percent from the current rate of 3.8 percent, reducing inflationary pressures from labor-intensive service sectors.

The OECD urged the government to reduce Australia’s structural budget deficit, which has been supported by rising income and corporate tax collections over the past two years, and called for reforms to Australia’s tax and expenditure system to support the energy transition and to help finance the costs of aging. population.

The OECD also urged the Anthony Albanese government to address the proliferation of the NDIS and release funding to support Australia’s energy transition and aging population.

Although inflation is slowly declining, higher rates can help lower inflation further

“This includes tangible measures to slow the growth of the cost of the National Disability Insurance Scheme, potentially through better clarity on the eligibility and scope of support packages, as well as improved management of the schemes,” the report said.

The National Disability Insurance Agency predicts the program will have more than 1 million participants by 2032 and cost nearly $100 billion a year.

Reforms were also recommended aimed at countering the country’s productivity malaise and positioning Australia for a period of ‘sustained economic growth’.

“Greater flexibility in land zoning systems would improve the ability of new businesses to enter and grow in desirable locations and increase competition in the business sector,” the OECD said.

“This also applies to efforts to further align product standards with those of other advanced economies.”

Measures to standardize occupational licensing and reform non-compete agreements, changes already underway by the federal government, were also approved.

Treasurer Jim Chalmers (pictured) said the report highlights the need to balance different demands

Ahead of the May budget due in just weeks, Treasurer Jim Chalmers said the report was an important reminder of the need to balance the competing demands of lowering inflation and supporting growth.

“While we have made substantial progress in improving the budget, having achieved the first surplus in fifteen years with a second on the horizon, we know that pressures on the budget are increasing, not decreasing,” Dr Chalmers said.

“The May Budget will continue our record of responsible fiscal management, ease the cost of living without increasing inflation, and lay the foundation for growth.”

However, shadow treasurer Angus Taylor claimed Labor had failed to show budgetary responsibility or restraint in their first two budgets.

“During this domestic inflation crisis, it is critical that the Albanian Labor Government’s third budget returns to a back-to-basics economic agenda that restores Australians’ living standards and secures our future prosperity,” Taylor said.