No recession but inflation hike and increased cost-of-living pressure on the way, Jim Chalmers says | Australian economy
Jim Chalmers confirmed the government expects inflation to rise above 4.5% in Australia, while households can expect significant additional cost of living pressures due to war in the Middle East.
But the treasurer said he did not expect the economy to go into recession because of the war sparked by US and Israeli bombings in Iran.
Chalmers said inflation, currently at 3.8 per cent and putting pressure on the Reserve Bank to raise interest rates this week, could peak in the “mid to high tertiles” according to Treasury modelling.
Speaking on Sky News on Sunday, he was asked about the National Australia Bank’s predictions that inflation could rise above 5% next quarter.
“We ran a number of scenarios that clearly laid out some realistic assumptions about global oil prices and how that would potentially be reflected in inflation and for how long,” he said.
“If we were to put pen to paper on these forecasts today, we would see inflation peaking in the mid- to high-fours, which isn’t too far off from some of the private forecasts.”
How long the conflict lasts will be critical to the blow to the economy, Chalmers said.
But the recession (two consecutive quarters of negative economic growth) was not something the federal government “predicted or expected.”
“If you look at the scenarios that the Treasury is currently running, they expect a hit to growth, but they don’t expect a hit to growth that will cause the economy to contract in the coming quarters,” Chalmers said.
“Again, there are too many unknowns, too much variability. Even before the dramatic escalation of hostilities in the Middle East a few weeks ago, there was too much uncertainty.”
The Reserve Bank’s board, which aims to bring inflation back to between the RBA’s 2% and 2% target, will meet this week to discuss the cash rate. Economists at the big four banks are predicting another increase in May, a decision that will be made just days before the May 12 budget.
Greens leader Larissa Waters has called on the RBA not to raise interest rates. “Raising rates will not stop the chaos of this illegal war that is causing inflation,” Waters said.
“People are already struggling with price gouging at the petrol pump and supermarket. The RBA should not be raising interest rates when this latest inflation push is a supply-side mess caused by a senseless war where interest rate rises cannot be stopped.”
Chalmers said the economic shock would not halt reform priorities for his fifth federal budget, which is expected to include a cut in the capital gains tax credit. He said the Treasury was “working on a range of tax reform options” for cabinet to consider.
Chalmers said Australia had ample fuel supplies despite increasing disruptions due to the Iranian regime’s moves to block the Strait of Hormuz.
One Nation MP Barnaby Joyce said Australia should join countries acting to support international fuel supplies by sending a navy ship to the Middle East.
US President Donald Trump called on countries to send warships to defend the strategic strait after the US attacked Kharg Island, Iran’s largest oil export terminal.
“You have to be part of a global effort,” Joyce told ABC TV. “If you are one of the beneficiaries of solving the problem, you should do something about it.”
Energy minister Chris Bowen on Friday reduced fuel companies’ minimum stock obligations to around 700 million liters of petrol and 2.2 billion liters of diesel respectively; This is a move to free up fuel for regional Australia.
Australia held reserves of approximately 36 days of gasoline and 32 days of diesel on March 3.
