EDITORIAL: RBA and Chalmers pulling in opposite directions over inflation and interest rates
EDITORIAL: A Government cash splash will be working in direct opposition to the RBA. And looking at the big picture beyond a possible small Government sugar hit, we will all be the losers.
Wham! Wham! And again wham!
After two previous interest rate rises this year the Reserve Bank of Australia has shown no mercy for home loan borrowers by hitting them with another interest rate hammer blow on Tuesday.
The bank lifted the cash rate another 25 basis points to 4.35 per cent — the highest level since February 2025 — and with fears of more to come.
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By continuing you agree to our Terms and Privacy Policy.The sound of the third-consecutive rates blow landing would have been followed by groans and gnashing of teeth across Australia as millions of borrowers took in the news that their household budgets were again being raided.
When they have finished looking behind the couch in the hope of finding some extra cash they may well look around for someone to blame.
The RBA offered the Middle East conflict and resulting oil price shock on top of existing high inflation.
While noting inflation had already started to pick up in the final months of 2025, the central bank’s monetary board said the conflict in the Middle East had resulted in “sharply higher fuel and related commodity prices, which are already adding to inflation”.
Others are going to look hard at the Albanese Government.
For months before the first bombs fell on Tehran the Government had been turbocharging economic demand by throwing cash at all manner of pet projects.
High demand amid weak productivity growth — which puts a capacity constraint “speed limit” on the economy — fired inflationary pressure.
So the pressure was already there before the war poured extremely flammable fuel on the inflationary fires.
Perhaps seeing the writing on the wall, Treasurer Jim Chalmers on Monday acknowledged government spending “is obviously part of aggregate demand” and said that was part of the thinking behind pursuing a net saving this year.
“Where we can play a helpful role, rather than a harmful role, in the amount of aggregate demand in the economy, obviously, we look for ways to do that,” he said.
Perhaps he didn’t look hard enough.
Because on Tuesday a report emerged that the Budget was expected to include a stimulatory tax offset putting up to $300 into the pockets of all working Australians in a direct contradiction of warnings from economists, the International Monetary Fund and now the RBA itself.
On Tuesday Reserve Bank Governor Michele Bullock made it clear Government handouts would make its task of trying to slow demand in the economy as it tried to haul back inflation even more difficult.
“If we are increasing interest rates, what we are trying to do is slow growth in demand,” she said. “To the extent that the government is demanding goods and services of the economy . . . whether it’s direct expenditure or giving money to households to spend on goods and services in the private sector, that adds to demand.”
A Government cash splash will be working in direct opposition to the RBA. And looking at the big picture beyond a possible small sugar hit, we will all be the losers.
