(Bloomberg) -- Australia’s balance of risks is tilted to the downside, including a potential stall in disinflation, the International Monetary Fund said, calling on the government to avoid excessive spending.
“The current restrictive monetary stance is appropriate, and needs to be supported by fiscal policy that avoids an expansionary stance and complements monetary policy’s disinflation objective,” the IMF said in the concluding statement of its 2024 Article IV Mission.
The report comes days after the center-left Labor government announced its budget is expected to slip deeper into deficit in the years ahead due to rising public demand and a weakening in key trade partner China. Australia is due to hold an election by May and political pressure to boost spending further is likely to increase.
Economists have repeatedly said the nation’s strong fiscal impulse is a key reason the Reserve Bank has resisted joining a global easing cycle.
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The RBA has left its key rate at a 13-year high of 4.35% since November 2023 and money market pricing implies a first cut will occur only in April or May.
“If disinflation stalls, tighter monetary and fiscal policies may be necessary,” the IMF said. “This contingent macro policy mix should ensure monetary and fiscal authorities complement each other to avoid overburdening any single policy instrument, while preserving targeted support amid rising living costs.”
The IMF expects Australia to emerge from its anemic growth phase helped by a recovery in private demand and “robust” government spending, though a further slowdown in key trading partners could threaten that outlook.
“Australia remains on a narrow path to a soft landing, but risks are tilted to the downside,” the IMF said.
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