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Interest rates to drop significantly over next year, global economic body predicts

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Australia is not far from a full percentage point drop in interest rates if the Organisation for Economic Co-operation and Development (OECD) is to be believed. The major financial institution, headquartered in Paris and led by former Australian finance minister Mathias Cormann, recently released its outlook for Australia, which said it expects the cash rate to fall to 3.35% by early 2026. “Given persistent deflation and below-potential growth, an easing of monetary policy is warranted over the coming year,” the report reads.

Global economic institutions predict that interest rates will fall sharply next year

The OECD sees interest rates falling by 1% over the next year or so. (Edwina Pickles) “Indeed, real interest rates have been rising as inflation has fallen and the nominal policy rate has remained unchanged since November 2023,” it added. “But with both headline and core inflation expected to fall back below target by early 2025, a gradual easing of policy is expected to start next year and continue by early 2026, with the policy rate falling to 3.35%.” This is broadly in line with forecasts from most of Australia’s major banks, which mostly predict four rate cuts by 2025, although ANZ is currently forecasting just two. However, the OECD warned that a prolonged period of higher-than-expected inflation could undermine the chances of a rate cut.It also warned that while economic growth was expected to pick up to 1.9 per cent next year and 2.5 per cent by 2026 (it grew by just 0.8 per cent in the 12 months to September), a tough crackdown on immigration could hamper progress. Both the federal government and the opposition have pledged to limit the number of migrants entering Australia, particularly to free up housing space. However, the OECD argues this could have unintended economic consequences. “An abrupt slowdown in immigration would hamper consumption growth,” it wrote. “Policymakers should be wary of worsening labour shortages, including in house construction, as they try to curb immigration to ease housing cost pressures,” it added.

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