EDITORIAL: RBA chief links government to inflation and rate rise
EDITORIAL: It is clear that the Government is a key driver of inflation — and by extension, interest rates. It is incumbent on the Government to deliver an antidote.
Deflect, obfuscate, discredit, deny, spin. All tools pulled out of the toolbox whenever politicians are faced with something they know to be correct, but which does not back up their narrative.
And this week they all got a workout as Treasurer Jim Chalmers tried to avoid any blame for the pain dished out to home loan borrowers by the Reserve Bank of Australia’s decision to raise interest rates to fight resurgent inflation.
Dr Chalmers has been arguing that private sector activity is fuelling inflation and not public sector spending, with both headline and underlying inflation now well above the Reserve Bank’s 2-3 per cent target.
Sign up to The Nightly's newsletters.
Get the first look at the digital newspaper, curated daily stories and breaking headlines delivered to your inbox.
By continuing you agree to our Terms and Privacy Policy.But the RBA Governor on Friday contradicted him as she outlined the relationship between government spending and inflation, and acknowledged it played a role in the central bank’s decision this week to lift interest rates.
“Government spending is part of total spending and total aggregate demand in the economy, so it, along with private spending, contributes to aggregate demand. And so to the extent that aggregate demand is above aggregate supply, which we think it is, that’s contributing to inflation,” Michele Bullock said. “That’s why we’ve decided to raise interest rates.”
Ms Bullock also warned of the possibility of another rate rise. “If we need to put up interest rates to slow the growth in demand, in aggregate demand, then that’s what we will do,” she said.
Ms Bullock made it clear government spending decisions affected interest rates. “Well, it does as does private. It’s part of aggregate demand,” she said.
Ms Bullock’s acknowledgement came after refusing on Tuesday “to comment on fiscal policy” when asked by journalists about the link between government spending and inflation.
Federal Government spending is forecast by Treasury to hit 26.9 per cent of gross domestic product in 2025-26, which outside of COVID would be the highest since 1986.
“Mathematically, you’re right. Public demand expenditure and private sector, all of that adds to demand,” Ms Bullock said. “That’s logical. It’s mathematical. That’s what happens.
“It’s factual. It’s not an opinion. It’s not a judgment, it’s a fact. That’s all is it.”
Ms Bullock also confirmed that government expenditure often showed up in private demand, with some private activity reliant on government contracts or subsidies like the discontinued electricity rebates. “What it often does is it transfers money to people, and it gives them money to spend,” she said.
Ms Bullock is the public face of the mortgage pain felt by the Australian people and so it is incumbent on her to explain its cause.
Dr Chalmers has been ready to take credit for good news but been unwilling to face bad news.
Ms Bullock has delivered an evisceration of the Government’s economic narrative. It is clear that the Government is a key driver of inflation — and by extension, interest rates. It is incumbent on the Government to deliver an antidote.
