The treasurer, Jim Chalmers, has welcomed a projection by the OECD that the Reserve Bank has probably reached its interest rate peak but played down the prospect of the government posting a second successive budget surplus.
The OECD, a body representing rich nations, released an update of its world economic outlook overnight. Its Australian section forecast that the RBA is probably done with rate rises for now.
“The projections assume that the cash rate will be held at this restrictive level until inflation is clearly declining to the target band, with 75 basis points of interest rate cuts assumed between the third quarter of 2024 and end-2025,” the report said.
The RBA lifted its cash rate this month to a 12-year high of 4.35% and has one final rates meeting for the year next Tuesday. It will not meet again until February.
Markets were pricing just a 2% chance of a rate hike next week, and also little prospect of a rate rise next year after October’s consumer price inflation came in weaker than expected, according to the ASX’s rates tracker.
The OECD report also assumed the federal government’s fiscal policy would “have a slightly contractionary influence on economic growth in 2024 and 2025”. Chalmers is expected to release the updated budget projections in the second week of December, with the likelihood that the deficit will be smaller than that projected in the May budget after higher than forecast tax receipts and royalties from commodity exports.
Chalmers told RN Breakfast on Thursday that the lower CPI figures and the OECD forecast showed “we are making some welcome progress in the fight against inflation and that will determine the future directory trajectory of interest rates”.
But he downplayed the prospect of another budget in the black, although the government’s fiscal position was improving in the short term at least.
“People shouldn’t anticipate that we will print a second surplus in that mid-year budget update,” he said. “They should expect to see a really substantial improvement in the bottom line.”
The OECD’s forecasts are in line with many other economists, including the International Monetary Fund in predicting economies are likely to avoid a recession even with the rapid increase in borrowing costs to quell inflation.
Price increases, though, are expected to remain persistent in many nations, including Australia, and the jobless rate is expected to tick higher from its current 3.7% level.
“The unemployment rate [in Australia] is projected to rise moderately, reaching 4.4% by mid-2025,” the OECD said. “Inflation will moderate, aided by abating global inflationary pressures, though inflation of some services components is anticipated to remain elevated throughout 2024.”
