Australia’s most powerful banker has given a strong hint that excessive public spending is to blame for high inflation, ruling out 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 rate cut in 2024 with the latest reduction of 25 basis points, taking its key interest rate from 4.5 to 4.75 percent.
While it remains marginally above Australia’s 12-year high of 4.35 per cent, it is another sign that Australia is missing out as the rest of the world cuts interest rates.
This week, Ms Bullock revealed she had personally told Treasurer Jim Chalmers that excessive government spending was causing Australia’s inflation problems.
“My reading, when I speak privately to the Treasurer, and when I listen to him speak on television and radio, is that he is fully aware of the inflationary implications of his own policies, and he needs to think about that, because he, like “I – understands that inflation is really what’s hurting people right now,” he told reporters Tuesday.
The RBA chief also told the Senate economics committee on Thursday that she hoped Dr Chalmers understood that inflation would not fall “sustainably” within the Reserve Bank’s 2 to 3 per cent target until the end of 2026.
“If you’ve read our monetary policy statement, you’ll have noticed,” he said.
Australia’s most powerful banker has given a strong hint that excessive government spending is to blame for high inflation and therefore no rate cuts (pictured Prime Minister Anthony Albanese with his fiancee Jodie Haydon )
While 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 will spike again to 3.7 per cent by the end of 2025, after those quarterly energy rebates expired.
While headline inflation is low now, core inflation – once volatile prices are removed – 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 is ‘sustainable’,” Ms Bullock told senators.
He 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 drop in price pressures was based on also falling inflation. underlying inflation.
“We’re focusing on the headlines, but we use the underlying to give us an indication of where they’re going,” he said.
By contrast, headline U.S. inflation in the year through September was much lower: 2.4 percent.
But the level of core inflation in the United States 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 continues to grow at a strong pace and inflation is more contained.
This gave the US Federal Reserve the impetus to cut rates again for the second time in 2024.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” he said in a statement.
By contrast, Bullock hinted that another rate hike was still possible.
“So there are some things around the edges that suggest there might be a little bit of upside risk here. That’s why I say we can’t rule anything out,” he said.
Australia no longer has the lowest interest rates among rich world nations: the Bank of Canada has a policy rate of 3.75 per cent, 60 basis points lower than Australia’s, after four cuts this year.
Bullock revealed this week that he 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 made one cut.
Bullock blamed federal and state governments for huge spending that is driving up inflation.
“I must emphasize that it is not just about the federal governments, but also about the state governments,” he 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 are happening.”
If Labor is re-elected next year, Prime Minister Anthony Albanese is expected to preside over $1 trillion in gross debt by 2025-26, representing 35 per cent of gross domestic product.
Australia’s big four banks (Commonwealth, Westpac, ANZ and NAB) expect the first rate cuts in February.
But the 30-day interbank futures market doesn’t see relief until June and now only has two cuts priced in for 2025 as the rest of the world continues to ease monetary policy.