Australia’s interest rates may need to stay higher for longer to beat lingering services inflation, an international economic body has warned.
In its latest economic outlook report, the Organisation for Economic Co-operation and Development said price pressures were expected to ease though some services, such as rent and insurance, would remain elevated throughout the rest of the year.
The nation’s economic growth is expected to slow to 1.5 per cent in 2024, with “stubborn services inflation” a downside risk to the growth outlook as tighter monetary policy than now assumed may be needed to tame it.
The Reserve Bank of Australia has left interest rates unchanged at 4.35 per cent since November and is widely expected to stay on hold at the May board meeting next week.
Hotter-than-expected March quarter inflation data has pushed out expectations for interest rate cuts in coming months and had some economists warning further hikes could not be ruled out.
The Paris-based OECD said a sharper-than-expected slowdown in the Chinese economy could pose a risk to growth by weakening demand for Australia’s iron ore and other exports.
Yet growth and inflation could be higher than forecast if households started spending more as their real disposable incomes recovered, rather than starting to rebuild savings.
Higher interest rates and cost of living pressures are expected to keep dampening household and business spending throughout the year but in 2025, economic growth is expected to rebound to 2.2 per cent.
The OECD urged the government to embark on budget repair and slowing the growth of the National Disability Insurance Scheme.
The disability scheme is one of the five fastest growing areas of budget spending, alongside health, aged care, defence and interest payments on debt.
With an ageing population and the climate transition weighing on the public purse, the OECD said reforms will be needed to promote medium-term fiscal sustainability.
Treasurer Jim Chalmers said government had “made substantial progress in getting the budget in better nick”, including delivering the first surplus in 15 years.
But less than two weeks out from handing down his third budget, he acknowledged pressures on the budget were building rather than subsiding.
“That’s why the May budget will continue our record of responsible fiscal management, provide cost of living relief without adding to inflation, and lay the foundations for growth through a Future Made in Australia,” Dr Chalmers said.
A range of other “productivity-enhancing reforms” were recommended to spur growth going forward, including more flexibility land zoning systems to allow new businesses to open up in desirable locations and boost competition.
It recommended banning non-compete agreements, a reform area the government is investigating.