Australia’s most powerful banker has given a strong indication that excessive government spending is responsible for high inflation, ruling out interest rate cuts until 2025.
The latest warning from Reserve Bank of Australia Governor Michele Bullock came before her US counterparts cut rates for the second time this year.
On Friday morning, the US Federal Reserve made its second interest rate cut of 2024, with the latest cut of 25 basis points, raising the key interest rate from 4.5 to 4.75 percent.
While still marginally higher than Australia’s 12-year high of 4.35 percent, it is yet another sign that Australia is missing out as the rest of the world cuts rates.
This week, Ms Bullock revealed she had personally told Treasurer Jim Chalmers that too much government spending was causing Australia’s inflation problems.
‘When I speak to the treasurer privately, and when I hear him speak on television and radio, I read that he is fully aware of the inflationary consequences of his own policies. He needs to think about that because he understands – like me – that inflation is really what’s hurting people right now,” she told reporters on Tuesday.
The head of the RBA also told the Senate economics committee on Thursday that she hoped Dr Chalmers understood that inflation would not be ‘sustainably’ within the Reserve Bank’s target of 2 to 3 per cent until the end of 2026.
“If he has read our statement on monetary policy, he would be aware of it,” she said.
Australia’s most powerful banker has given a strong indication that excessive government spending is responsible for high inflation – and therefore no interest rate cuts (Pictured: Prime Minister Anthony Albanese with his fiancée Jodie Haydon)
Although headline inflation has fallen to a three-and-a-half-year low of 2.8 percent, the figure is based on one-time $300 electricity rebates and falling gasoline prices.
The RBA also published new forecasts this week that inflation would rise back to 3.7 percent by the end of 2025 after quarterly energy rebates expired.
While headline inflation is now low, underlying inflation – excluding volatile price components – was higher at 3.5 percent in the year to September.
The Reserve Bank does not expect this core measure of inflation – also known as the trimmed average – to fall ‘sustainably’ to 2.5 per cent until December 2026.
“The key word there is ‘sustainable,’” Ms. Bullock told senators.
She also explained that while the RBA’s target of 2 to 3 per cent was based on headline inflation – also known as the consumer price index – a sustained decline in price pressures was also based on a decline in underlying inflation.
“We focus on the headlines, but we use the underlying information to give us an indication of where the headlines are going,” she said.
In contrast, US headline inflation in the year to September was much lower, at 2.4 percent.
But the US level of underlying inflation was higher, at 3.3 percent.
The latest warning from Reserve Bank of Australia Governor Michele Bullock came before her US counterparts cut rates for the second time this year
Unlike Australia, the US economy is still growing at a strong pace and inflation is better under control.
This gave the US Fed the impetus to cut interest rates again for a second time in 2024.
“Recent indicators suggest that economic activity has continued to grow at a robust pace,” the report said in a statement.
Ms Bullock, on the other hand, hinted that another rate hike was still possible.
“So there are just some things around the edges that indicate there might be a little upside risk. That’s why I say we can’t rule or rule anything out,” she said.
Australia no longer has the lowest interest rates among rich countries, while the Bank of Canada has a policy rate of 3.75 percent, which is 60 basis points lower than Australia’s – after four cuts this year.
Ms Bullock revealed this week that she had personally told Treasurer Jim Chalmers that too much government spending was causing Australia’s inflation problems
The European Central Bank has cut rates three times in 2024, the Reserve Bank of New Zealand has cut rates twice, while the Bank of England has cut rates once.
Ms. Bullock blamed the federal and state governments for big spending that increases inflation.
“I have to emphasize here that it’s not just about the federal governments, it’s about the state governments as well,” she said.
“So the fact that we’ve had to revise our public demand forecasts reflects the fact that there have been more announcements and more things have happened.”
Should Labor be re-elected next year, Prime Minister Anthony Albanese is expected to take on more than $1 trillion in gross debt between 2025 and 2026, accounting for 35 percent of gross domestic product.
The big four Australian banks – Commonwealth, Westpac, ANZ and NAB – expect the first rate cuts in February.
But the 30-day interbank futures market won’t see relief until June and has now priced in just two cuts through 2025 as the rest of the world continues to ease monetary policy.