December 5th 2024.
According to the Organisation for Economic Co-operation and Development, Australia may soon see a significant drop in interest rates. This major financial body, led by former Australian finance minister Mathias Cormann and based in Paris, recently released its outlook report for Australia. In the report, it predicts that the cash rate could potentially decrease to 3.35 per cent by early 2026.
The organisation believes that a reduction in monetary policy is necessary over the next year due to ongoing disinflation and below-potential growth. As stated in the report, "An easing of monetary policy is warranted over the next year given ongoing disinflation and below-potential growth." This view is supported by the fact that inflation is decreasing and nominal policy rates have remained unchanged since November 2023, resulting in an increase in real interest rates. The organisation expects this trend to continue and lead to a gradual easing of policy, ultimately bringing the policy rate down to 3.35 per cent by early 2026.
This forecast is in line with the predictions of most major banks in Australia, who are also expecting four rate cuts in 2025. However, ANZ has revised its forecast and is now only predicting two rate cuts. Despite this, the OECD has cautioned that inflation may hinder the chances of easing interest rates if it remains higher than expected for an extended period of time.
The organisation also highlighted the potential impact of a drastic crackdown on immigration on the Australian economy. While growth is expected to pick up to 1.9 per cent next year and 2.5 per cent in 2026, the OECD believes that limiting the number of migrants coming to Australia could hinder this growth. The federal government and opposition have both promised to restrict immigration, particularly to alleviate the strain on housing. However, the OECD warned of unintended economic consequences, stating, "Policymakers should beware, in seeking to curb immigration to ease pressures on housing costs, of worsening labour shortages, including in house-building."
In conclusion, the Organisation for Economic Co-operation and Development has forecasted a potential drop in interest rates for Australia in the coming years. While this is in line with the predictions of major banks, the organisation has cautioned against the potential negative effects of high inflation and immigration restrictions on the economy.
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