EDITORIAL: RBA exposes Budget deficit and interest rate link
Deflect, deny, spin have been the hallmarks of the Federal Government’s stance on issues around the Budget, economy, and the myriad ways that plays out for those hoping for interest rate relief.
And so it has fallen to Reserve Bank of Australia Governor Michele Bullock, in her best governor language, to point out what is really going on.
On Wednesday morning Ms Bullock exposed what Federal Treasurer Jim Chalmers has been doing his best to downplay.
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By continuing you agree to our Terms and Privacy Policy.Appearing at a Senate estimates hearing, the RBA governor made it clear: Bigger Budget deficits lead to higher interest rates.
Ms Bullock told the committee that government spending would help “put a bit of upward pressure on the neutral rate”.
“It means if we want a restrictive policy, it means that the cash rate has to be set higher than a higher neutral rate,” she said.
As an analysis in The Nightly explains, the “neutral rate” is the level of official interest rates that neither expands or contracts the economy.
Restrictive policy refers to using interest rates to get people spending less so inflation falls.
What Ms Bullock was driving at is that interest rates have to be higher when governments borrow, because the money they inject into the economy has an inflationary impact the central bank has to counter.
And so despite weak economic growth of 2.1 per cent in the year ended September 30, the central bank can’t cut interest rates because inflation is too high.
The Department of Finance last week 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 $10b deficit for all of 2024-25. Treasury is forecasting a $42.1b deficit for 2025-26.
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 even further above the central bank’s 2-3 per cent target.
It is expecting inflation to remain above that band until 2027.
ANZ on Tuesday joined the Commonwealth Bank and NAB in forecasting no more relief next year from the RBA.
Shadow treasurer Ted O’Brien did not bother with the cautious language Ms Bullock chooses to use.
He said Ms Bullock’s admission was a sign Labor’s deficit spending was keeping interest rates at higher levels.
“The Reserve Bank has confirmed that Labor’s spending spree and rising deficits are putting upward pressure on interest rates,” he said.
“Labor’s choices have made inflation more persistent and interest rates higher than they need to be.
“Australian households are carrying the cost of a Government that has lost control of the Budget,” Mr O’Brien said.
For those battling cost of living pressures and pinning their hopes on getting interest rate relief next year the scenario they face is looking increasingly bleak.
