The Organisation for Economic Co-operation and Development (OECD) has made a bold prediction for Australia’s economic future, forecasting a significant drop in interest rates over the next year. According to their latest outlook, Australia could see the cash rate fall by as much as one percentage point by early 2026, potentially reaching 3.35%.
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Easing of Monetary Policy Expected as Inflation Slows
The OECD’s report suggests that the easing of monetary policy is likely to occur in response to slowing inflation and below-potential economic growth. Since November 2023, interest rates have remained unchanged, which has led to an increase in real interest rates. However, as inflation continues to fall and is expected to return to target levels by early 2025, the OECD anticipates that the Reserve Bank of Australia (RBA) will gradually begin lowering rates.
“The disinflationary trend and the ongoing below-potential growth rate make a case for a reduction in interest rates,” the OECD noted in its report. This aligns with the projections of several major Australian banks, most of which predict at least four rate cuts in 2025, although ANZ has revised its forecast to only two cuts.
The Role of Inflation and Immigration in Economic Forecasts
While the outlook points to easing interest rates, the OECD also warned that inflation could delay or limit the expected rate cuts. If inflation remains stubbornly high for longer than anticipated, the RBA may be forced to hold off on cutting rates or adjust its approach to monetary policy.
The OECD also touched on Australia’s economic growth forecast, predicting a modest recovery with the economy expected to grow by 1.9% next year and 2.5% in 2026. However, the OECD raised concerns over potential policy decisions surrounding immigration. Both the federal government and opposition have suggested reducing the number of migrants coming to Australia, particularly in an effort to alleviate housing pressures.
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The OECD cautioned that cutting immigration too sharply could have negative consequences for Australia’s economy, particularly regarding consumption growth. A sudden slowdown in immigration could exacerbate labor shortages, including in key sectors like house-building, and potentially harm the overall economic recovery.
“Policymakers must be cautious when curbing immigration to address housing affordability, as it could worsen labor shortages,” the OECD warned.
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As the Australian economy navigates a delicate path between controlling inflation and fostering growth, the prospect of lower interest rates offers hope for households and businesses alike. However, the ongoing risks posed by inflation and potential changes to immigration policy will require careful management from Australian policymakers to ensure the country’s economic recovery remains on track. The next year could be pivotal as Australia seeks to balance easing monetary policy with the broader challenges facing the economy.
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