How Jim Chalmers’ cost of living budget could backfire – forcing the Reserve Bank to raise interest rates, prolonging the cost of living crisis AND causing a devastating rent spike
- The Reserve Bank could still raise rates despite the increase in rent aid
- Experts say rental assistance will not make rent affordable
The Reserve Bank of Australia could still raise interest rates with an economist warning that a 15 percent increase in Commonwealth Rent Assistance could exacerbate price pressures.
Labor has pledged $2.7 billion over five years to raise the maximum rate of aid for struggling tenants, amounting to $31 every fortnight, as part of its budget aimed at tackling the cost of living.
CoreLogic’s head of research for Australia, Eliza Owen, said the federal government’s rent relief plan could actually exacerbate the rent crisis, as JobSeeker was also increased by $40 every two weeks from September – on top of biennial indexation for inflation.
“With housing supply initiatives not scheduled until 2024 and no cap on rent increases for private landlords, there is a greater risk that these income increases will only further depress rental values,” she said.
Credit rating agency S&P Global Ratings director Anthony Walker warned that budget spending would see inflation stay higher for a year longer than expected by both the Treasury and the Reserve Bank.
“We expect inflation to be stubbornly above the Reserve Bank of Australia target through fiscal 2026,” he said.
Four days before Tuesday night’s budget, the RBA warned that higher rents could exacerbate inflation.
“Rental inflation is expected to continue to rise over the coming year and to contribute significantly to inflation over the forecast period,” the Reserve Bank said in its statement on monetary policy.
The Reserve Bank of Australia could still raise interest rates with an economist warning that a 15 percent increase in Commonwealth Rent Assistance could exacerbate price pressures (pictured is Treasurer Jim Chalmers with his wife Laura and their children in the House of Representatives)
RBA Governor Philip Lowe has also left open the possibility of another rate hike, after this month raising cash rates for the 11th time in a year to a new 11-year high of 3.85 percent.
“Further monetary policy tightening may be needed to ensure inflation returns to target within a reasonable timeframe, but that will depend on how the economy and inflation evolve,” he said.
Ms Owen said Commonwealth Rent Assistance’s $31 every fortnight increase for 1.35 million households from September would be insufficient to help rent affordability, with data from SQM Research showing a rental vacancy rate of 1.1 per cent on the markets of the capital.
Sydney’s median weekly apartment rent rose 30.1 per cent to $654.45 in the year to April following the return of international students and the Treasury Department expects a record 400,000 migrants to arrive in Australia in 2022-23.
Labor has pledged $2.7 billion over five years to raise the maximum aid rate for troubled tenants (pictured is a rent queue in Sydney)
RBA Governor Philip Lowe has also left open the possibility of another rate hike, after raising the spot rate to a new 11-year high of 3.85 percent this month for the 11th time in a year (he is pictured with Perth philanthropist Janet Holmes a Court)
The Treasury is more optimistic than the Reserve Bank about inflation easing, after hitting a 32-year high of 7.8 percent in December and falling to 7 percent in the last quarter.
The budget papers allowed the consumer price index to moderate to 6 percent in June 2023 and 3.25 percent in June 2024, putting it only slightly above the RBA target of 2 to 3 percent.
At Treasury, inflation had fallen to 2.75 percent by June 2025.
But the Reserve Bank’s statement on monetary policy was slightly less optimistic, forecasting headline inflation to ease to 6.25 percent in June 2023 and fall to 3.5 percent in June 2024.
The CPI would not fall back to 3 percent until June 2025.
Westpac chief economist Bill Evans noted that Treasury based its more optimistic forecasts on cost-of-living measures such as the Energy Price Relief Plan, the increase in Commonwealth Rent Assistance and the Pharmaceutical Benefits Scheme subsidies, which pushed headline inflation decreased by 0.75 percentage point.
“These measures are not expected to contribute to broader inflationary pressures,” he said.