IMF Warns Australia to Restrain Spending as RBA Considers Fourth Rate Hike

The International Monetary Fund (IMF) has urged Australian governments to keep spending in check as the Reserve Bank of Australia (RBA) considers raising interest rates for a fourth time this year. The RBA's cash-rate target is already at 4.35%, and traders now imply an 87% chance of another quarter-point increase at the September 29 policy meeting.

The IMF's assessment suggests that the central bank should be prepared to raise rates if needed, while federal and state governments should limit demand through tighter budgets. This two-part policy problem is uncomfortable for investors because a rate increase caused by vigorous private demand is easier to absorb than one needed due to prolonged inflation from government spending and an energy shock.

A fourth hike would take the cash rate to 4.60%, closer to the 4.85% path now embedded in market pricing. For households with mortgages, this could lead to increased monthly payments, draining discretionary spending. Australian banks may receive support from higher asset yields, but higher rates can slow new lending and increase arrears.

The RBA's August minutes suggest that financial conditions have become somewhat restrictive, the cash rate is at the top of estimates for neutral, and demand for new housing loans has declined. However, underlying inflation remains above the RBA's target, and the board is willing to respond if upside risks persist.