As Australians prepare for the festive season, the International Monetary Fund (IMF) is raising concerns about the economic outlook, specifically regarding interest rates and inflation. With billions expected to be spent over Christmas and New Year’s, the IMF warns that inflation may stall, pushing the Reserve Bank of Australia (RBA) to consider raising interest rates in 2025.

IMF’s Concerns: Inflation Could Stall

The IMF’s latest assessment points to a potential risk that Australia’s inflation rate could stall in its progress toward the RBA’s target range of 2–3 percent. Although the RBA has been on a path to reduce inflation with its rate hikes, the IMF suggests that the economy may not see the desired progress soon enough.

According to the IMF, the RBA will need to remain focused on this “final descent” to bring inflation under control while still being mindful of economic growth. The global financial agency expressed concern that any stall in disinflation could be a significant setback, especially if the RBA’s restrictive monetary policies don’t align with the government’s fiscal strategy.

In other words, even though inflation is dropping, there are fears it might not continue its steady decline, leaving the RBA with little choice but to raise interest rates again in 2025 to keep things on track.

Will the RBA Hike Rates in 2025?

Shane Oliver, the chief economist at financial services firm AMP, notes that the potential for further rate hikes in 2025 could come from the government’s fiscal policy. The fear is that the government might ramp up spending, especially as the country heads toward a general election. This could lead to higher inflationary pressures, which might push the RBA to act by raising interest rates rather than cutting them.

Oliver explains that the risks of looser government fiscal policy are heightened by the political uncertainty of the upcoming election, where promises to boost spending could lead to more government borrowing. This spending would add to inflationary pressures, which the RBA is trying to control through its interest rate hikes.

Government’s Budget Update and Spending Risks

While there is concern over potential increases in government spending, Oliver suggests that the Mid-Year Economic and Fiscal Outlook (MYEFO), the government’s most recent budget update, has reduced those risks for now. The update indicated that much of the new spending planned by the government is in future years, rather than this financial year. For instance, $5.6 billion in proposed spending is slated for later years, meaning it won’t immediately affect the RBA’s decision-making.

“If the government were to introduce significant spending right now, it could force the RBA to take action sooner,” says Oliver. “But for now, the impact on interest rates is unlikely to be immediate.”

However, if the government were to pump large sums of money into the economy over the next few months, it could lead to higher inflation, forcing the RBA to raise rates more aggressively in 2025 to keep things under control.

What Does This Mean for Australian Consumers?

As Australians spend big over the holiday season, the IMF’s warning signals that interest rates may not remain stable for long. If inflation doesn’t continue to fall as expected, the RBA could increase borrowing costs in the coming year. This means Australians could see higher interest rates on their mortgages, loans, and credit cards.

For many people, this could make it more expensive to borrow money and add pressure on household budgets. With the festive season often encouraging extra spending, some economists are concerned that if inflation remains high, it could impact the economy’s overall recovery.

What’s Next for the RBA and Government?

Looking ahead, much will depend on how the government balances its fiscal policy and whether it moves forward with more stimulus spending. If the government increases spending significantly in the short term, it could push inflation back up, prompting the RBA to raise rates again in 2025.

The RBA is working to ensure that inflation stays under control and doesn’t reverse its progress. But with the uncertainty of a potential change in government and election promises of additional spending, the financial outlook for the coming year remains unclear.

The Risk of Higher Rates and What It Means for You

If inflation stalls and government spending increases, there’s a real risk that interest rates will rise next year. For homeowners, this could mean higher mortgage repayments, which could strain household finances. It also means higher costs for anyone borrowing money, whether for personal loans or credit cards.

AMP’s Shane Oliver noted that if spending increases substantially in the coming months, the RBA may have to act quickly, despite the fact that many of these spending decisions are still in the pipeline for future years. So, while the festive season might seem like a time to relax and enjoy the holidays, it’s also a reminder that the economic situation could change quickly in the new year.

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What Can Australians Expect in 2025?

With all eyes on inflation and government spending, 2025 could be a pivotal year for the Australian economy. The IMF’s warning about potential interest rate hikes signals that the country’s monetary policy will remain under close scrutiny.

Whether or not the RBA raises rates will largely depend on how inflation behaves in the coming months and how much pressure the federal government’s budget puts on the economy. For now, Australians will have to stay vigilant and be prepared for the possibility that interest rates might not stay as low as they have been recently.

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Conclusion: The Road Ahead for Australian Borrowers

In the immediate term, Australian consumers can expect a period of uncertainty, especially as Christmas spending ramps up. The IMF’s warning of possible interest rate hikes in 2025 reminds Australians that their financial situation might change if inflation doesn’t continue to drop. For anyone with a mortgage or other forms of debt, the coming year could bring higher interest rates and tougher financial conditions.

As the RBA continues to monitor the economy and work towards its inflation target, Australians should be prepared for potential changes in interest rates and plan their finances accordingly.

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