Bank chief faces grilling on first rate hike since 2023
The Federal Reserve governor will be questioned again about the role the federal government played in fueling inflation and forcing the central bank to raise mortgage rates for the first time in more than two years.
Michele Bullock, her deputy Andrew Hauser and other senior central bank officials will report to Parliament House in Canberra on Friday for regular questioning by a committee of Labour, Liberal and crossover MPs.
Since the Reserve Bank raised its benchmark borrowing rate to 3.85 percent on Tuesday, opposition MPs have bombarded Finance Minister Jim Chalmers with accusations that increased government spending is responsible for a resurgence in inflation.
Dr Chalmers’s mid-year budget update, published in December, predicted Commonwealth spending would reach 26.9 per cent of GDP this financial year; this is the highest level since the 1980s, excluding the COVID-19 pandemic.
“And it raises inflation, it raises interest rates,” said opposition finance spokesman James Paterson.
“Until we get spending under control, this will hurt the Australian people.”
Some economists, including AMP’s Shane Oliver, Deloitte Access Economics partner Stephen Smith, EY chief economist Cherelle Murphy and HSBC’s Paul Bloxham, say high government spending is contributing to the Reserve Bank’s inflation problem.
Household spending recovered more strongly than the Central Bank expected, driven by three interest rate cuts and income tax cuts in 2025.
The economy began to overheat as high public spending added fuel to the fire.
The result was higher inflation.
“Fundamentally, we’re seeing aggregate demand in the public and private sectors pushing the limits of growth, and that’s what we’re seeing now in terms of inflation as well,” Ms. Bullock said at Tuesday’s post-conference rate meeting.
Dr Chalmers noted that Ms Bullock, apart from a brief mention of aggregate demand, attributed the inflation surprise mainly to an unexpected acceleration in private demand.
“What we saw in the economy in 2025 was that public demand growth contributed less to demand in the economy, while private demand growth contributed more to growth in the economy,” he said during question time on Thursday.
The ratio of public expenditure to total demand has fallen, but this is only due to the relative increase in public demand.
Unless there is a sudden jump in productivity growth or a reduction in public spending, this will continue to crowd out the private sector and put pressure on the Central Bank to raise interest rates further to control inflation.
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