IMF says RBA may need more hikes as it urges Australia to cut spending

The International Monetary Fund (IMF) warned that the Reserve Bank of Australia (RBA) should stand ready to raise interest rates further due to persistent underlying inflation pressures and potential second-round energy price shocks. In its annual consultation report, the IMF trimmed Australia's 2027 economic growth forecast to 1.6%, down from earlier projections, largely attributing the downgrade to the increased likelihood of additional monetary tightening. The fund also urged Australian federal and state governments to curb public spending to assist in reining in inflation. Rising global energy costs serve as the primary catalyst behind the renewed price pressures, with Brent crude surging 35% since early August to surpass $108 per barrel amid Middle East conflicts. Money markets currently reflect an 80% to 87% probability of a 25-basis-point rate hike at the RBA's September 29 meeting, with terminal rate expectations reaching 4.85% by early 2027. For currency markets, the prospect of further RBA tightening supports the Australian Dollar across major crosses, keeping Australian monetary policy aligned with broader global tightening following recent rate hikes by the Federal Reserve.