Reserve Bank of Australia Governor Michele Bullock admits bigger Budget deficits lead to higher interest rates
Reserve Bank of Australia Governor Michele Bullock has conceded bigger Budget deficits lead to higher interest rates.
In her last appearance this year before a parliamentary committee, she confirmed Liberal senator James Paterson’s suggestion there was a link between higher Government spending and the RBA’s neutral cash rate where it was neither stimulating nor restricting demand.
“All other things equal, if there is less savings in the economy and that includes by the Government as well as by the private sector, and at the same time investment doesn’t come down, so all other things equal, then that will put a bit of upward pressure on the neutral rate,” she told a Senate estimates hearing on Wednesday morning.
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By continuing you agree to our Terms and Privacy Policy.“It means if we want a restrictive policy, it means that the cash rate has to be set higher than a higher neutral rate.”
The RBA is broadly expected to leave the cash rate unchanged at 3.6 per cent into 2026 after inflation in the year ended October 31 climbed by 3.8 per cent, putting the consumer price index further above the central bank’s 2-3 per cent target.
ANZ on Tuesday joined the Commonwealth Bank and NAB in forecasting no more relief next year from the RBA.
The futures market sees no rate cuts out to April 2027.
The Department of Finance last week also revealed the Budget deficit covering the first four months of the 2025-26 financial year - or July 1 to October 31 - had added up to $32.9 billion.
This was more than triple the $10 billion deficit for all of 2024-25.
