Reserve Bank forecasts see-sawing interest rates as economy worsens

Lowe said as inflation moved around more often, it would be “increasingly problematic” for central banks to hold inflation with narrow target bands.

That meant governments had to get their budgets in order and drive policies that lifted productivity and ensured the economy was flexible enough to deal with rapid changes.

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“In a world of more frequent supply shocks, we will be better off if there is flexibility in our labour and product markets so that we can respond quickly and effectively,” he said.

“This includes flexibility in terms of fiscal policy, which requires maintaining a strong underlying structural budget position.”

The October budget showed Treasury expects the federal budget to remain in structural deficit – which excludes unusual flows of income such as high commodity prices – until at least 2032-33.

Lowe made the comments ahead of the release of the OECD’s global economic outlook, which points to recession levels of growth in the United States and much of Europe through 2023. Growth among developed nations is expected to tumble from 2.8 per cent in 2022 to just 0.8 per cent next year.

The Paris-based think tank is forecasting the Australian economy to expand by 4 per cent this year before sharply slowing to 1.9 per cent in 2023 and then 1.6 per cent the year after that.

Growth will slow as consumers respond to higher interest rates, with household spending tipped to tumble from 7 per cent this year to just 2 per cent in 2024.

Despite the slowdown, unemployment is tipped to edge down to 3.5 per cent next year from 3.7 per cent before increasing to 4 per cent in 2024.

The OECD said the RBA, which meets for the last time this year on December 6, will have to keep lifting interest rates while cautioning the Albanese government against handouts.

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It acknowledged there were several risks to the Australian economy, particularly if the RBA had to push interest rates up higher for longer to deal with inflation.

“More persistent price pressures could cause a stronger decline in real incomes and more aggressive policy tightening by the central bank. Falling house prices may also further weaken residential construction and household spending,” it said.

Treasurer Jim Chalmers said the government was using the budget, which this year is expected to show a deficit of $36.9 billion, to restrain public spending and keep a lid on inflation

“The government takes seriously the OECD’s warning when it comes to making sure that fiscal policy doesn’t make the job of monetary policy harder – that’s why our budget was carefully calibrated to deal with the inflation challenge in our economy,” he said.

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