Reserve Bank Governor Michele Bullock has fired a shot across the Treasurer’s bow, warning Jim Chalmers in plain terms that if next week’s Budget doesn’t help cool inflation, Australians can expect more interest rate rises.
The interest rate outlook from Reserve Bank Governor Michele Bullock has become so worrying that this highly ranked public servant decided she had to stick it to her boss, Treasurer Jim Chalmers. In no uncertain terms, she basically said if he doesn’t help her in next week’s Budget, there’ll be more rate rises ahead.
Right now, economists who are paid to ‘guess’ the economy’s future and the rate decisions of the RBA are predicting two more increases could be out there waiting to happen, unless the Treasurer promises to cut spending and dampen demand.
Another alternative that could kill future rate rises would be the Iran war dragging on, creating fuel rationing and rising job losses. This would mean we’d be heading into a recession, which not only kills social and economic life as we know it, but it also creates bankruptcies, forced house sales, lower home prices and political unpopularity.
With its implications for oil prices, this Iran war is the curveball this economy never had to have, and so the tough measures that should’ve come from the Treasurer to help bring down inflation, is now being imposed from without via the oil price hits on inflation, which in turn has forced the RBA’s hand.
Encouragingly, Bullock has struck back, telling it the way it is, putting the Treasurer on notice that if his Budget fails the RBA sniff test, more rate rises will be coming.
The Daily Telegraph says Deloitte Access Economics partner Stephen Smith said the “RBA is not quite done” and could send the cash rate to “levels not seen for around 15 years”.
Meanwhile, Westpac’s economics team thinks we could cop a rate rise in June and August, if the Budget or Donald Trump does not make the RBA’s job easier.
Yesterday, I suggested that the RBA boss should warn the Treasurer, that if his Budget is a dud, she would raise rates again, and she basically took my advice.
Of course, Bullock did not employ the more aggressive tone that I tend to use when frustrated with recalcitrant mistake makers, but she did some pretty direct finger-pointing towards Canberra.
This is what she said: “When governments are spending a lot of money and we’re running up against capacity constraints, then they do need to think about whether or not there’s ways they can help the inflation problem by looking for ways to constrain demand”.
Of course, Chalmers is not alone in this overspending by the public sector, as state governments are all contributors. Victoria’s budget deficit for 2024-25 was $2.2 billion, which is the highest of any state government in history and its state net debt is heading to $187.8 billion by 2028.
Not surprisingly the Treasurer has come out swinging, arguing that government spending has not created the inflation that has forced interest rates up, but it is Trump’s war and the “recovering private sector”.
This is what he is running with: “For those people who are pretending the government’s budget is the sole driver of prices in our economy or interest rate decisions, they weren’t saying that last year when interest rates were cut three times.”
No, they weren’t but that was because everyone, including Treasury, were not expecting government policy offerings that were generous would be taken up with such gusto.
For example, the 5% Deposit Scheme for home ownership was taken up by 243,000 Australians and the FBT exemption for EVs led to a take up by 100,000 car buyers. And then there was the overspending on the NDIS, which has been calculated to be 8% more than was planned and cost the Budget $3.7 billion.
In fact, the financial year cost of NDIS was $52 billion!
To be even-handed, I should report that the latest look at the budget deficit for this financial year, which is nearly over, has fallen from an estimate of $42.1 billion to $36.8 billion.
How did that happen? Try stronger than expected economic growth and lower unemployment, which leads to higher tax receipts, and guess what has helped this stronger economic growth?
Try government spending.
For those wondering how this increase of the cash rate from 4.1% to 4.35% will affect your mortgage, it means a $117 hit a month on a $700,000 loan.
Next week’s Budget will be assessed in terms of whether it helps us or hurts us in terms of interest rates.
Hard to see them fix the budget when all they really care about is not losing votes
There is no apparent commitment from Government to reduce excessive spending and total failure to address poor productivity. Unless this happens we will get more of the same
Basic UNSW economics 101 1975 . Government overspending leads to inflation or put another basic way – Too high demand chasing too few goods. The Keynesian principles
haven’t changed since. Someone take the treasurer back to uni.
They are a government who believe that by creating division they will remain in power longer.
First is their re-creation of pre Hawke/Keating workplace relations driving a wedge between workers and employers.
Now we have age based division based on the new catch cry of “intergenerational inequality”.