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RBA must push rates to 5%: IMF

The International Monetary Fund has called on the Reserve Bank of Australia to raise the official cash rate to 5% by the end of the year in order to maintain a neutral monetary policy setting.

Although the current rate of 4.25% was "closer to being neutral", the IMF said, Australia's economic recovery meant that further hikes would be necessary.

Markets are already expecting rates to rise higher this year. Yesterday, investors increased the probability of a May rate rise from 32% to 48%.

Some economists believe that a neutral setting will not be enough, and that the RBA will have to push rates to restrictive settings in the order of 6% by the end of 2011.

"The trick now is not to get lost in what is neutral or normal, because the economy is heading way past neutral or normal, and monetary policy will have to follow," Access Economics director Chris Richardson told AFR.

A 6% cash rate would take the average Big Four SVR to 8.88% from its current 7.13%.

By BN | 30 Apr 2010

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