Blame game begins as Reserve Bank delivers rate pain
The Central Bank’s decision to raise the benchmark borrowing rate to 3.85 percent put an end to the shortest easing cycle during the inflation targeting period.
The opposition was quick to point the finger at Finance Minister Jim Chalmers after the RBA confirmed its move on Tuesday, given the central bank’s dramatic U-turn from cuts to increases in six months.
“This rate increase is not a coincidence,” Opposition Leader Sussan Ley and shadow treasurer Ted O’Brien said in a joint statement.
“This is the direct result of Labour’s spending addiction, which has kept inflation higher for longer and left the RBA with no option but to continue tightening.”
The RBA board said it had no choice but to raise interest rates after a modest increase in demand caused a “material” increase in inflation pressures, while the opposition argued that it was government spending that was pushing the economy over the speed limit.
Dr Chalmers’ mid-year budget update presented in December showed government spending was expected to rise to 26.9 per cent of GDP this financial year; This is the highest level in decades, excluding the pandemic.
The Central Bank’s updated forecasts, also published on Tuesday, showed public demand exceeded its previous forecasts in November.
Its forecasts for public demand were 0.1 points higher in 2025 and 0.2 points higher by June 2026.
But as governor Michele Bullock said at the post-meeting press conference, that was nowhere near the upside surprise due to increased private demand.
“Private demand over the last six months has proven to be much stronger than we anticipated,” he said.
Dr Chalmers was quick to point out that the RBA points to private demand as the culprit.
“We have seen public demand in our economy decline over the past year, while private demand has increased strongly, which explains the additional pressure on inflation,” he said during question time.
But Ms Bullock pointed out that Australia’s productivity growth was so significant that the economy could not sustain a higher level of growth before price pressures began.
Stephen Smith, partner at Deloitte Access Economics, said the blame extends beyond the current government.
“The fact that an economy growing at 2.3 per cent is coping with inflation woes points to a more fundamental problem in our economy: our poor capacity to produce goods and services and our low growth rate,” Mr Smith said. he said.
“The fact that we are here is an indictment on the piecemeal and lackluster nature of the reforms of the last three decades.”
The result is a lower forecast growth in household disposable income, that is, in living standards.
“This is not an ambition for Australia,” Mr Smith said.
“If this is really that good for economic growth, then Australia has bigger problems than just a rate hike.
“Today’s decision will increase pressure on the May budget to deliver meaningful reform that will boost investment, increase productivity and deliver an economy that can grow faster without inflationary pressures.”
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