The Organization for Economic Co-operation and Development has urged the Reserve Bank to keep interest rates higher for longer to help control inflation.
In its latest Economic Outlook, released on Thursday evening, the Paris-based think tank, led by former Australian federal finance minister Mathias Cormann, called for measures to ease inflationary pressures, cut Australia’s structural deficit and strengthen anemic productivity growth.
While the OECD expects inflation, currently at 3.6 percent, to continue to decline, it anticipates that prices for some services will remain high, requiring a delay in interest rate relief.
The report has forecast three rate cuts between the September quarter and the end of 2025.
“Monetary policy should remain restrictive in the short term to control inflation,” the OECD report states.
The OECD, led by former Coalition finance minister Mathias Cormann, called for changes to future-proof Australia’s economy.
However, if the economy proved more resilient and caused services inflation to remain persistent, the OECD warned that Australia’s central bank could also be forced to resume its aggressive streak of rate hikes.
“A downside risk to economic growth is that controlling persistent services inflation may require tighter monetary policy than currently assumed,” he said.
According to OECD forecasts, Australia’s real GDP growth is expected to slow to 1.5 per cent through 2024 before recovering to 2.2 per cent in 2025, as the impact of the aggressive series RBA rate hikes will reduce household consumption and business activity.
At the same time, the unemployment rate is expected to rise to 4.3 percent, up from its current rate of 3.8 percent, helping to reduce inflationary pressures from labor-intensive service sectors.
Urging the government to cut Australia’s structural budget deficit, which has been boosted by rising income and business tax collections over the past two years, the OECD called for reforms to Australia’s tax and spending system to help finance the energy transition and the costs of an aging economy. population.
The OECD also urged Anthony Albanese’s government to clamp down on runaway NDIS growth to free up funds to support Australia’s energy transition and aging population.
Although inflation is slowly declining, more rates can help reduce inflation further
“This includes tangible measures to curb the growth in costs of the National Disability Insurance Scheme, potentially through greater clarity around the eligibility and scope of support packages, as well as better administration of the scheme,” says the report.
By 2032, the National Disability Insurance Agency predicts the program will have more than 1 million participants and will cost nearly $100 billion a year.
Reforms designed to counter the country’s productivity malaise and position Australia for a period of “sustained economic growth” were also recommended.
“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.
“So would efforts to further align product standards with other advanced economies.”
Also supported were measures to standardize occupational licensing and reform non-compete contracts, changes already underway by the federal government.
Treasurer Jim Chalmers (pictured) said the report highlights the need to balance different demands.
Ahead of the May budget due in a few weeks, Treasurer Jim Chalmers said the report provided an important reminder of the need to balance the competing demands of reducing inflation and supporting growth.
“While we have made substantial progress in getting the budget into better shape, having achieved the first surplus in 15 years and with a second in perspective, we know that pressures on the budget are increasing, not decreasing,” said Dr. Chalmers.
“The May Budget will continue our record of responsible fiscal management, provide cost-of-living relief without increasing inflation, and lay the foundation for growth.”
However, shadow treasurer Angus Taylor said Labor had failed to exercise fiscal responsibility and restraint in its first two budgets.
“During this local inflation crisis, it is crucial that the Albanese Labor Government’s third budget returns to a back-to-basics economic agenda that restores Australians’ living standards and secures our future prosperity,” Mr Taylor said.
