30 November 2023, By Jon Bragg
The OECD predicts that inflation will hit the top of the Reserve Bank’s target band earlier than the central bank currently expects, allowing for rate cuts next year.
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According to projections by the Organisation for Economic Co-operation and Development (OECD), the Reserve Bank of Australia (RBA) will begin easing monetary policy in Q3 2024.
In its latest Economic Outlook published on Wednesday, the OECD predicted that the RBA will deliver a total of 75 basis points of interest rate cuts between Q3 2024 and the end of 2025, steadily taking the cash rate down to 3.60 per cent.
The OECD said the cash rate is expected to remain at its current “restrictive level” of 4.35 per cent “until inflation is clearly declining to the target band”.
While the RBA has forecast that inflation will only hit the top end of its 2–3 per cent target range by the end of 2025, the OECD instead expects that inflation will ease at a faster pace and fall to the top of the target band by early 2025.
“Inflation will moderate, aided by abating global inflationary pressures, though inflation of some services components is anticipated to remain elevated throughout 2024,” it noted.
A number of top economists also believe that inflation is tracking below the RBA’s latest forecasts after the monthly consumer price index (CPI) indicator from the Australian Bureau of Statistics (ABS) eased to 4.9 per cent in October, down from 5.6 per cent in September.
Speaking on ABC Radio on Thursday, Treasurer Jim Chalmers said that the OECD’s report and the ABS data showed “we are making some welcome progress in the fight against inflation and that will determine the future trajectory of interest rates”.
OECD’s global outlook
Due to the effects of monetary policy tightening, weaker trade, and lower business and consumer confidence, the OECD said that global growth will remain modest moving forward.
The organisation has projected global GDP growth of 2.9 per cent in 2023, 2.7 per cent in 2024, and 3.0 per cent in 2025, with Asia accounting for the bulk of this growth.
“The global economy continues to confront the challenges of both low growth and elevated inflation, with a mild slowdown next year, mainly as a result of the necessary monetary policy tightening over the past two years,” said OECD secretary-general Mathias Cormann.
“Inflation has declined from last year’s peaks. We expect that inflation will be back at central bank targets by 2025 in most economies.”
The OECD expects that inflation will gradually ease towards the targets of central banks in most economies. Consumer price inflation in OECD countries is expected to decline from 7.0 per cent in 2023 to 5.2 per cent in 2024, and 3.8 per cent in 2025.
https://www.investordaily.com.au/regulation/54365-oecd-tips-rba-will-begin-cutting-rates-from-q3-2024