Reserve Bank cautioned to hasten slowly on interest rate cuts



“Monetary policy needs to remain prudent to ensure that underlying inflationary pressures are durably contained,” it said.

“Scope exists to lower policy interest rates as inflation declines, but the policy stance should remain restrictive in most major economies for some time.”

But it also noted inflation had fallen faster than expected in most countries, adding that the full impact of interest rate increases had yet to feed through economies.

The OECD’s outlook for the Australian economy over this year and next has not changed from its November report.

It is forecasting Australian GDP to expand by 1.4 per cent this year and 2.1 per cent in 2025, making it one of the fastest-growing developed countries monitored by the OECD.

The organisation is expecting Australia’s inflation rate to fall to 3.5 per cent this year and 2.8 per cent in 2025, well above other developed nations.

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In an examination of the factors contributing to inflation in major economies, the OECD estimates more than half of Australia’s inflation in 2023 was caused by supply-side factors. A third was put down to demand while the rest was described as “ambiguous”.

Australia’s inflation profile was similar to those of France (the world’s seventh-largest economy) and Britain (sixth largest). Domestic demand was a bigger driver of inflation in the United States while supply-side issues were key issues in both Canada and South Korea.

The Reserve Bank has been forecasting the jobs market to slow in response to higher interest rates. The national jobless rate rose from 3.5 per cent to 3.9 per cent through the second half of 2023.

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The ANZ-Indeed’s closely watched measure of job advertisements, released on Monday, showed a lift of 1.7 per cent in January after a 0.6 per cent improvement in December. Despite the increase, it is still 13 per cent down over the year although at a historically high level.

Indeed senior economist Callam Pickering said although the figures suggested the job market was showing resilience under the weight of higher interest rates, the overall economy was slowing.

“Our view is that economic conditions will remain subdued this year, particularly within the household sector, and that should prove sufficient to bring inflation back to target,” he said.

“And that’s likely to happen well ahead of the RBA’s current forecasts. Rate cuts in the second half of the year are increasingly plausible and there will be lots of discussion to that effect.”

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