The International Monetary Fund (IMF) has raised the prospect of a Reserve Bank interest rate hike in 2025, with concerns inflation progress will stall.

The Reserve Bank of Australia (RBA) has been working towards returning inflation to the target band of 2–3 per cent.

The IMF warned the central bank should remain focused on that “final descent” while “nurturing growth”.

“Inflation is anticipated to sustainably return to the RBA’s target range only by the end of 2025, while a potential stall in disinflation poses a significant risk,” the financial agency said.

It is also concerned the government’s fiscal policy is working against the RBA’s restrictive monetary policy, in a manner that contradicts the disinflation objective.

Chief economist at financial services company AMP Shane Oliver said the risks of a looser fiscal policy were heightened with a looming general election.

“Well there’s certainly a risk coming in the election that the government could undertake a bunch of promises which add to the outlook for government spending which then puts pressure on the Reserve Bank to hike [interest rates] rather than cut,” he said.

However, he noted the government’s latest budget update reduced that risk.

“When you look at the MYEFO — the mid-year budget update — all the potential spending they’re talking about is in the category called ‘decisions taken but not yet announced’,” Dr Oliver said.

“I think there was $5.6 billion, the bulk of that is actually in subsequent years.

“It’s not in this financial year.

“So I think if any extra spending were to occur, it would occur in a year or two and therefore it wouldn’t be relevant for the Reserve Bank right here, right now.”

He added this would change if the government decided to “pump in a whole lot of spending right now”.

Australian jobs market too tight

Another concern for the IMF is the state of the Australian jobs market.

Both Treasury and the Reserve Bank had forecast unemployment to peak at 4.5 per cent but, so far, that has not materialised.

Indeed, the unemployment rate fell to 3.9 per cent in November, despite more Australians losing work.

“Growth is expected to pick up over the following quarters, supported by a gradual recovery in private demand and robust public demand.”

That private demand could pick up as early as this week.

Australians will flock to Boxing Day sales this year, with a total of $1.3 billion set to be spent, new data from the Australian Retailers Association (ARA) and Roy Morgan shows.

“For the six days following Christmas, shoppers will continue to make the most of the bargains, spending a total of $3.7 billion across that period, up 2.7 per cent on last year,” the ARA said.

But the IMF has said if this widens the gap between what the RBA calls aggregate demand and aggregate supply, the central bank would need to hike interest rates.

“If disinflation stalls, tighter monetary and fiscal policies may be necessary,” it said.

“This contingent macro policy mix should ensure monetary and fiscal authorities complement each other, to avoid overburdening any single policy instrument, while preserving targeted support amid rising living costs.

“Monetary policy should be prepared to tighten further if upside inflation risks materialise, and expenditure rationalisation at all levels of government could help reduce aggregate demand and support a quicker return of inflation to its target.”

Dr Oliver said he could not rule out an RBA interest rate hike in 2025 but thought it would be highly unlikely.

“Yes, if inflation stalls and goes back up again, then that’s a big problem for the Reserve Bank,” he said.

“Yes, there is a chance the Reserve Bank may still have to raise interest rates but I think the probability of that is very, very low.”

The Reserve Bank has been saying now for years that it is keen to keep the Australian economy on a “narrow path”.

The alternative to that narrow path would be a recession.

“Growth slowed in the first half of the year, with household consumption weak as real incomes remained soft.

“Downside risks to growth include persistent weakness in private demand or a further slowdown in key trading partners.”

The next major economic data event will be the release of the December-quarter inflation data from the ABS at the end of January.