2 weeks Ago By Ellen Ransley and Matthew McKenzie
The Reserve Bank was forced to adjust its expectations as a result of “higher than expected” Government spending, casting shadows around Treasurer Jim Chalmers’ claim Labor was making progress in the fight against inflation. The RBA denied borrowers reprieve and kept rates on hold at 4.35 per cent for the 12th consecutive month on Tuesday, limiting the window for a pre-election rate cut sweetener.
The decision not to cut rates, despite inflation trending back towards the RBA’s target, immediately became a political football given the bank had also admitted it had underestimated growth in government spending across all levels. Dr Chalmers said the decision not to hike rates further reflected the impact of rate rises “already in the system”, and the progress “we are making together”. “Rates haven’t gone up since last Melbourne Cup day.
So it’s been a year now since rates last went up,” he said. “And that reflects two things. Firstly, the impact of rate rises already in the system.
Australians are already doing it tough enough when it comes to dealing with these higher interest rates. And secondly, it reflects the progress that we are making together in the fight against inflation.” But shadow treasurer Angus Taylor said the reason rates hadn’t yet been cut was because the Government was “so out of its depth in dealing with this problem”.
He pointed at the $16bn HECS-HELP debt write-off announcement made by Labor on the weekend as evidence. “There is no such thing as a free lunch . .
. That will come in either higher taxes or even more immediately in higher inflation. One way or another, it will be paid for by Australians,” he said.
“This is a Government that has decided to play a political game, to put bandaids on bullet wounds, and not deal with the underlying source of the problem here.” In her post-meeting press conference, RBA governor Michele Bullock warned that although growth had now stagnated, the economy was still running too hot with aggregate demand still above aggregate supply. She said she believed Dr Chalmers was “fully aware of the inflationary implications of his own policies”, adding that she expected the Federal and State Governments to be “very conscious about what’s hurting people”.
However, the bank said Government spending was likely to remain “robust” over the coming years. Matt Mckenzie Sean Smith In explaining why the bank had underestimated public spending, she said it was because of new announcements not built into previous forecasts; timing changes; and because of the decisions of state governments. At its second last meeting of the year, the RBA updated its underlying inflation predictions, forecasting its preferred pricing measure — which it strips away volatile prices and energy subsidies — is not expected to fall into the bank’s target bank until mild-2025.
Headline inflation is now expected to edge further down from its current 2.8 per cent rate into next year, but is forecasted to jump to 3.7 per cent by the end of 2025 unless the Federal Government extends its energy rebates.
It is then forecasted to gradually fall back to 2.5 per cent by the end of 2026. The bank said it would not start cutting rates until inflation was “sustainably” in the 2-3 per cent target band.
Economists at ANZ and AMP chief economist Shane Oliver have retained their view that rates could be cut in February. Mr Oliver said the central bank had slightly softened its tone and seemed to have greater confidence in the direction of inflation. Investment bank HSBC is still predicting a cut will not arrive until the second quarter of 2025 but warned borrowers may be left waiting longer.
“We see an increasing risk that it takes even longer for cuts to be delivered, or that the RBA misses the easing phase altogether,” the bank said. The RBA also released its quarterly statement on monetary policy on Tuesday, which dialled down forecasts for economic growth and revised unemployment slightly upwards..
