Reserve Bank governor Michele Bullock has taken her most aggressive swipe at the federal government for fuelling inflation through high spending, warning Australians were becoming ‘poorer’.
Reserve Bank governor Michele Bullock has taken her most aggressive swipe at the federal government for fuelling inflation through high spending, warning Australians were becoming “poorer” and headed for a “very, very tough time” as the economy wrestles with dual threats from pre-war pressures and high oil prices due to the Middle East.
The cash rate hike of 25 basis points to 4.35 per cent was passed by eight out of nine RBA board members. It wiped the last three cuts and increased average mortgage repayments on a $700,000 loan by $317.
Meanwhile some economists have tipped two more hikes, which would push the cash rate to 4.85 per cent, with Deloitte warning there is a “credible risk that rates could rise to levels not seen (since 2011)”.
Moments before Ms Bullock urged greater action from the government, Treasurer Jim Chalmers blatantly rejected claims his spending was fuelling inflation.
Instead he blamed a recovering private sector and the war in the Middle East, and said Australians were being held “hostage” to “decisions taken in Washington DC or indeed in Tehran”.
“Now the Reserve Bank statement … does not point to public spending as a factor in their decision to increase interest rates today, and I think that’s really important,” he said, a week out from delivering the federal budget next Tuesday.
“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.”
However, during her press conference Ms Bullock said the RBA was being confronted with dual inflation threats of pre-war “excess demand” and economy-wide pressures posed by high fuel prices.
In her most unflinching assessment that government spending, both state and federal, is fuelling inflation, she said that “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”.
She said non-means tested sugar hits like a proposed $200 to $300 income offset and other examples where the “government make up the shortfalls for households by giving them more money … makes it harder to dampen demand”.
Cautioning that higher prices are still to come, and that it was “not unreasonable” for businesses to pass on cost increases, Ms Bullock said the Middle East conflict was making Australia “poorer”.
“This shock has a real income shock for Australia and the world. Australians are poorer because of this shock to oil prices and energy prices and all the other commodity prices that are being impacted.”
Ms Bullock also flagged the risk of a recession unless businesses can pass on cost increases because of rising fuel prices.
“You’d be wrong … to expect that businesses would not look to pass on some of the costs of doing business,” she said.
“Otherwise, if they can’t, then what’s going to happen to the businesses? Then you will end up in a recession.”
Westpac became the first big four bank to tip two more 25 basis point hikes in June and August, which would take the cash rate to 4.85 per cent, levels unseen since the global financial crisis in 2008.
However 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”.
He said the RBA would hold rates for the next few months to assess how far prices will rise and whether the Strait of Hormuz will be reopened.
While he acknowledged Labor is in a “tricky spot with inflation” and facing a difficult budget, cost-of-living relief needs to be “very, very targeted” – and spending needs to be reduced.
“It’s doable but if they’re spending more than they are saving, or splashing money to people who don’t really need it, then they are doing more harm than good in terms of cost-of-living,” he said.
Shadow treasurer Tim Wilson said any incoming cost-of-living relief would be consumed by inflation, and said the reported tax offset was “likely to experience the same problems.”
He said the above target underlying inflation of 3.3 per cent, which removes volatile price fluctuations was evidence of Mr Chalmers’ “active inflation agenda”.
“This government has a consistent pattern of behaviour which is to fuel inflation, then tax the inflation, then spend that inflation and keep the cycle going,” he said.
Sydney mum of three Svetlana Ibrina, 39, said she is watching every dollar as she raises three children in a single-income home while renting at Girraween in Sydney’s west.
“I definitely noticed our grocery bills are more expensive, the rent and my sons’ school fees,” she told The Daily Telegraph.
“Since 2024 it’s just been going up and up … if rent increased, it would be painful,” she said.
“I would have to scrape money from the kids’ activities, their sport and recreation, and have to budget for groceries. And I would have to go back to work, which would be hard with my youngest.”