Budget handout claims fuel fears of further rate pain
Economists warn that Chancellor of the Exchequer Jim Chalmers must deliver on his promise of a disciplined budget or the Reserve Bank risks being forced to raise interest rates further.
After the RBA raised interest rates for a third consecutive day on Tuesday, economists were divided on whether the central bank would follow up with further increases or take a long break.
Economists at NAB join Westpac in predicting another rise in June.
But the Commonwealth Bank and ANZ Bank continued to forecast the RBA would leave the cash rate at 4.35 per cent, but ANZ Australia’s Head of Economics Adam Boyton said “risks will now appear more skewed towards a rate hike in August” given the board’s hawkish tone.
Paul Bloxham, HSBC’s chief domestic economist, said the rises since February had allowed the RBA to enter “wait and see” mode.
However, if the treasurer announces higher-than-expected spending in the upcoming budget, the bank may have to act more decisively.
“A key risk in our view is that the federal budget due on 12 May will be more expansionary than we have assumed, which could force the RBA to make further increases,” Mr Bloxham said.
Governor Michele Bullock said government aid, such as rumored tax cuts or fuel duty cuts, was increasing demand, which the RBA was trying to reduce as part of its fight against inflation.
“The fact that the government is making up for household deficits by giving them more money makes it harder to reduce demand,” Ms Bullock told reporters.
“When governments spend a lot of money and we face capacity constraints, they need to think about whether there are ways they can help the inflation problem by looking for ways to constrain demand.”
He added that it’s not just the federal government that’s driving demand.
The debt-laden Victorian government dumped an extra $18 billion into its pre-election budget on new spending initiatives on Tuesday.
Deloitte Access Economics partner Stephen Smith said governments needed to work better in concert with the central bank to control inflation.
“Accordingly, next week’s federal budget will be critical,” he said.
“The government will need to show a real commitment to fiscal discipline and structural reform, rather than relying on broad-based, short-term cost-of-living measures that may provide temporary relief while contributing to the persistence of inflation in the medium term.”
Mr Smith said genuinely productivity-enhancing reforms were needed to increase the economy’s supply capacity in the long term.
Business Council chairman Bran Black said the RBA’s decision underlined the need for productivity reforms to stimulate investment and restrict spending.
“Households and businesses of all sizes are already feeling the pressure, and the government should not increase that pressure,” he said.
Dr Chalmers said the budget would be Labour’s most responsible yet and would play a useful role in tackling inflation.
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