Australia’s Official Cash Rate Unlikely to Increase in 2024: OECD

Guests arrive at the OECD headquarters in Paris, France, on Nov. 27, 2013. Antoine Antoniol/Getty Images

The Organisation for Economic Co-operation and Development (OECD) says Australians are unlikely to experience any more interest rate rises in 2024.

In a newly released global economic outlook report, the OECD outlined its forecasts for Australia’s economic conditions in the next two years and the likely actions of the Reserve Bank of Australia (RBA).

The report stated that despite the rapid rise of Australia’s official cash rate, which grew from the historic low of 0.1 percent to the current 4.35 percent, the RBA would likely hold rates until inflation showed signs of declining to the target range of two to three percent.

It then predicted a 0.75 percent drop in the official cash rate between the third quarter of 2024 and the end of 2025.

The OECD cited several reasons for its forecast, including a projected lower budget deficit in 2023 caused by a sharp rise in tax receipts from businesses and households.

It also predicted a slowdown in economic growth in 2024 and 2025 due to the impact of the policies.

The OECD also stated that the federal government’s Energy Price Relief Plan, which includes a price cap on wholesale coal and gas prices and energy bill relief, could reduce headline inflation by 0.75 percent by the second quarter of 2024, and thus contribute to the RBA’s decision to put interest rates on hold.

Australia’s Unemployment to Rise

The report predicted that while Australia’s real GDP growth would drop from 1.9 percent in 2023, to 1.4 percent in 2024, it would rebound to 2.1 percent in 2025.

“The accumulated impact of higher interest rates and cost of living pressures will dampen spending by households and businesses over the coming year, though this will be partly offset by continued strong working-age population growth, and the ongoing recovery in education and tourism exports,” it said.

The OECD also expected Australia’s unemployment rate to rise steadily to 4.4 percent by mid-2025 while forecasting a slowdown in goods and services price growth caused by declining global inflation pressures.

The Australian quarterly consumer price index climbed 5.4 percent in the 12 months to the September quarter, down from 6 percent and 7 percent in the previous two quarters.

In terms of challenges, the OECD said Australia faced fiscal pressures from rising costs related to population ageing and the transition to net zero.

“Annual fiscal costs from health and long-term care are estimated to increase by 0.8 percent of GDP between 2023 and 2040,” the report said.

To cope with growing government expenditures, the OECD then advised the Australian government to raise revenue by reducing private pension tax breaks, as well as lifting or broadening goods and services tax (GST).

However, Treasurer Jim Chalmers has rejected the OECD’s recommendations, saying they were not something the government was currently interested in.

“There’s no shortage of issues that we’ve taken on that are politically difficult–the energy transformation, the legislation we’re introducing today on superannuation tax concessions, the PRRT (petroleum resource rent tax), the multinational tax agenda,” he told ABC Radio.

“We’ve got a pretty full book when it comes to difficult tax reform, and we’re trying to advance that through the Parliament as we speak.”

Treasurer Jim Chalmers speaks to media during a press conference in Brisbane, Australia, on April 20, 2023. AAP Image/Jono Searle

Westpac Bank Predicts Interest Rates to Remain Unchanged in December

The OECD’s report comes as Westpac Bank, one of Australia’s big four banks, reaffirms its forecast that the RBA would keep the official cash rate unchanged in December.

To back up their forecast, Westpac economists said the RBA had recognised the disinflation in goods prices in its recent monetary policy statements.

The economists also said there was not enough evidence of an increase in inflation from economic data since November that could prompt the central bank to take action.

“October retail sales were soft; unemployment and underemployment are drifting up as expected; and business surveys are pointing to price pressures easing from high levels,” they said.

“Together with the downward revision in the RBA’s wages forecasts, we do not see an upside surprise on inflation—and so a reason for the RBA Board to move again this month—coming from this source.”