RBA raises rate. Leaves pressure on Chalmers’ tax fiddling

As widely expected, the Federal Reserve today raised interest rates by a further 0.25 percentage points in line with Jim Chalmers’ next budget. Michael Pascoe reports.

The headline is the RBA’s third rate hike in a row, this time with the board voting eight to one as business cries that the economy is cooling, but the story is the little extra pressure the bank is putting on next week’s Federal budget.

Don’t think the Albanian Government will give a bold or game-changing response. I will come back to this topic.

The RBA’s May monetary policy (SMP) statement, published a week before the budget, is the bank’s traditional way of getting economic forecast retaliation first. While the Bank and Treasury draw support from the same bowl of the Joint Economic Forecast Group, each adds its own interpretation, with the latter clearly more likely to reflect the government’s preferences.

The RBA message, or at least the message as perceived and conveyed by commentators, is the usual mantra of the need to boost productivity while warning of sticky inflation. As always, the bank stumbles and stays in its monetary lane when it comes to anything that could be considered fiscally prescriptive.

Government spending will slow down

However, SMP predicts that the growth in public demand (public expenditure) will slow down in the difficult period ahead. The RBA has forecast 3.1% for calendar 2026, 2.8% for the new financial year and 2.1% for 2027-28, with growth expected at 3.7% this financial year.

As you know, housing investment, which is the solution to our biggest economic problem, is expected to decline from 3.8% growth in this financial year to just 1% in the new financial year and minus 1.1% in 2027-28. As we have noted before, housing is the root of our “cost of living” and inequality stories.

Watch the fees boogeyman – it’s housing, stupid

The bank’s latest forecast is for the economy to weaken, unemployment to rise and inflation to remain above the mandated range for next year, despite an assumed 60-point increase in interest rates. The first 25 of these points were duly delivered.

This despite the RBA’s deputy chief economic officer, Sarah Hunter, stating that there was nothing monetary policy could do about the dual effects of Trump’s war: weaker GDP growth and higher inflation.

One of the silver linings of Governor Michele Bullock’s media conference was the indication that another rate hike is not a given. He wouldn’t go so far as to agree to be in a “wait and watch” phase, but the question of what happens next is open.

Ms Bullock said the board viewed the new cash rate of 4.35 per cent as “a bit restrictive”. Sarah Hunter had previously told reporters that the bank rated 4.1 percent as “neutral,” albeit at the upper end of neutrality.

Continuing tightening, as the money market expects, is expected to deliver a CPI of 2.4% in June next year – just below the middle of the RBA’s mandated target – with the bank’s preferred shortened average measure falling to 2.6% in December 2027.

Interestingly, the bank predicts that the wage price index will remain stable at 3.2% for the next 20 months.

does not expect the unemployment rate to worsen much until fiscal year 2027-28.

The (relative) optimism that unemployment will be 4.3% this Christmas and 4.4% next June seems to me to be at odds with the most current information rather than older figures in the rearview mirror.

Investor opinion

As the RBA board made its interest rate decision and the Governor sold it at the Macquarie investment conference, the message was: yes, times are getting tough.

The bank’s latest business manager also makes the same warning. As always, the business community is reporting to the bank that “the labor market is a bit tight” but now “hiring intentions have been declining lately.”

“The share of firms currently reporting plans to keep headcount constant next year is well above the long-term average, and the share of firms expecting lower headcount has increased,” says SMP.

What will Albo do?

So, with this message, plus Trump’s international crisis, huge parliamentary majority and dysfunctional opposition, can Labor seize the opportunity for real change and escape Albanese’s incrementalism?

Short answer: No.

Don’t be fooled by the headlines swirling about the proposed capital gains tax and what the negative gearing changes may or may not be. Whatever happens next Tuesday night,

They do not contribute to major reform that will transform our economy or solve the housing crisis.

You don’t have to be an old professional skeptic to suspect that all the hints, putdowns, denials, suggestions and winks about CGT and NG are fooling us. This is a government that produces a lot, not too much.

Yes, a few unfair aspects of our tax system are likely to be tweaked for the better, and that’s nice, but it’s not a huge farce, and once it’s sold as the solution to the housing affordability crisis, the horse has largely escaped and will not be ridden again with this little reform.

Depending on the final details, it should help first home buyers bid up some on existing homes, but it won’t make a difference to the people who need it most – the 1.4 million households receiving Commonwealth Rental Assistance, effectively subsidizing private landlords, is a testament to the policy culpability of many governments in the massive abandonment of public housing.

Jim Chalmers’ housing dream is still a fantasy

And CGT, NG and the tightening of family trusts are just the inconspicuous fruits of tax reform, policy changes sold by others and steadily bought by voters over the last decade; It’s not hard stuff that Timid Tony Albanese isn’t ready to touch. Oh my goodness, it seems offshore gas isn’t even ready to fix the return of the PRRT, while there is huge public support for at least a windfall profit tax element.

AFR’s Phil Coorey ($) wrote An insightful column last week explaining how Labor is using osmosis to push for tax reform by following the electorate rather than leading it. Partially:

“The consultant candidly claimed that the government had spent the months leading up to the budget suing to reverse the reduction along with its negative gearing concessions, and that details would be forthcoming.

“In reality he did no such thing. Instead he hid behind disingenuous rhetoric such as ‘no decision has been taken’ and therefore ‘policy has not changed’, leaving all the heavy lifting to the Greens, independents, media, economists and various other advocates.”

“It was the same rebuke directed at us last term when the government made good on its election promise and decided to redistribute tax cuts in the third phase. Everyone and their aunts knew what was going on but ‘no decisions were taken’ and ‘the policy did not change’ until the cabinet signed the reshuffle.”

Real tax reform that gets serious about improving Australia’s outlook and intergenerational equality means a full package that will ultimately benefit the nation but inconvenience just about everyone else.

Expanding the GST, working with states on a universal land tax, tackling the ridiculous largesse of giving loans to people who don’t pay taxes, reducing income tax rates and, yes, gas exporters will need to mend the PRRT fiddle.

Only the last of these qualifies for “osmosis.” He would get the rest faster and by spending political capital.

But that’s another story.

‘Sold out’: housing supply hit as affordability falls