The International Monetary Fund is urging the federal government to quickly repair the budget and the Reserve Bank to keep lifting interest rates, warning there are growing risks inflation will become entrenched and devastate the living standards of ordinary people.
Ahead of a meeting of G20 finance ministers in Bali that will include Treasurer Jim Chalmers, the head of the IMF, one of the world’s key economic advisory organisations, said global economic growth is slowing due to the problems posed by rampant inflation and the war in Ukraine.
IMF managing director Kristalina Georgieva is telling G20 countries they need to lift interest rates and tighten budgets to reduce inflationary pressures.Credit:Bloomberg
Kristalina Georgieva on Wednesday night told the meeting of the treasurers of the world’s 20 largest economies that they and their central banks had to make tough decisions now, otherwise next year could be worse than 2022.
“It is going to be a tough 2022 – and possibly an even tougher 2023, with increased risk of recession,” she said.
“Countries must do everything in their power to bring down high inflation. Persistently high inflation could sink the recovery and further damage living standards, particularly for the vulnerable.”
Central banks around the world have started to increase interest rates in response to a strong lift in inflation.
In Australia, the Reserve Bank has increased rates at its three past meetings, from 0.1 per cent to 1.35 per cent. Markets and economists expect another half percentage point lift when the RBA board next meets in early August.
On Wednesday, the central banks of New Zealand and South Korea lifted their cash rates by half a percentage point. South Korea is now at 2.25 per cent while NZ, which started increasing rates in October last year, is at 2.5 per cent.
Georgieva revealed the IMF, which provides policy advice as well as cheap loans to nations around the globe, would downgrade its forecasts for global growth this year and next in its outlook update that will be released later this month.
She said most central banks would need to continue to tighten monetary policy “decisively” to bring inflation to heel, especially in countries where there was a risk that the community started to believe prices would continue to climb.
“Without action, these countries could face a destructive wage-price spiral that would require more forceful monetary tightening, with even more harm to growth and employment. Acting now will hurt less than acting later,” she said.
The IMF head said governments had to help central banks by tightening fiscal policy through cuts in expenditure.
Governments also had to introduce structural reforms to boost growth, such as labour market policies that encouraged more women into employment.
“New measures must be budget-neutral, funded through new revenues or expenditure reductions elsewhere, without incurring fresh debt and to avoid working against monetary policy. This new era of record indebtedness and higher interest rates makes all this doubly important,” she said.
Australian federal government gross debt last week reached a record $895.2 billion and is forecast to surpass $1 trillion by 2024.
Federal Treasurer Jim Chalmers warns inflation will “get worse before it gets better”.Credit:Alex Ellinghausen
Chalmers is due to deliver an economic update when the new parliament resumes on July 26.
On Wednesday, the treasurer said that update would contain new forecasts for inflation, wages growth and GDP and what they will mean for the budget.
The March budget forecast a deficit of $78 billion this year, inflation to grow by 3 per cent after lifting by 4.25 per cent in 2021-22 and wages to improve by 3.25 per cent.
Chalmers said the update would confirm the government could not go ahead with all the spending proposals demanded by voters as it was committed to repairing the budget, which remained under heavy pressure.
“I’ll be doing that because I want Australians to understand the gravity of the economic situation that we are in, but also not just the size of the challenge, the shape of the challenge too,” he said.
“Inflation will get worse before it gets better, but it will get better. And next year we expect inflation to moderate.”
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