Now the dust has settled after Tuesday’s Reserve Bank decision to raise interest rates, we can step back and take a considered view.
So, deep breath. What does it all mean? Get ready to tighten your belts. The outlook is decidedly bumpy. Former Reserve Bank of Australia economist and Monash University senior economics lecturer Zac Gross said that with Tuesday’s rate hike factored in, the RBA may have to hike rates four times in 2026 and 2027, based on its updated inflation forecasts.
But getting somebody to take responsibility for it is not that easy. Treasurer Jim Chalmers is not putting his hand up to acknowledge that he or the Government carry at least some of the blame.
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That is despite many economists taking the view that excessive Government spending is putting too much heat into the economy and driving up inflation beyond the RBA’s target range.
On Tuesday a 25 basis point hike took the RBA cash rate to 3.85 per cent and reversed a rate cut in August.
The RBA is now forecasting that headline inflation will hit a three-year high of 4.2 per cent by June 2026, with its updated Tuesday afternoon predictions replacing the November forecasts of a 3.7 per cent inflation rate by the middle of this year.
Inflation isn’t expected to fall within the 2-3 per cent target band until mid-2027.
But during a round of media interviews Dr Chalmers was holding his line on Wednesday. “What I was doing yesterday was pointing out to people who want to pretend wrongly, dishonestly, that this inflation challenge is all government spending,” the Treasurer said.
Dr Chalmers blamed private sector activity for the inflation surge after Treasury, the RBA and the major banks had consistently underestimated the inflation challenge.
Judo Bank’s chief economic adviser Warren Hogan noted there was a clear link between high government spending and soaring inflation. “That is self-evident. The government spending is a big factor in the inflation and the weak productivity we have seen throughout the last four years,” he told The Nightly.
By way of comparison, Federal government payments in 2009-10 — when Dr Chalmers was then treasurer Wayne Swan’s principal adviser — made up 25.8 per cent of gross domestic product.
This financial year, government spending is expected to comprise 26.9 per cent of the economy even though there is no global economic calamity requiring a multi-billion-dollar stimulus package.
For her part, RBA Governor Michele Bullock steered clear of the government spending issue on Tuesday. “I’m not going to comment on fiscal policy because it’s an independent policy,” she said.
She was also not prepared to dip her oar into the issue of improving the nation’s lamentable productivity. “Productivity is the issue and I’m not the productivity tsar,” Ms Bullock said.
Someone has to take up the challenge. Not only Dr Chalmers must step up. The Government as a whole faces some tough decisions. And that could leave many Australians even worse off.
