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No, the budget does not make further interest rate rises more likely


Inflation, as Prime Minister Anthony Albanese has said, is “a burden on the poor”.

The big budgetary challenge for him and Treasurer Jim Chalmers was to provide relief to Australians struggling with cost of living pressures without increasing inflation.

Has the government achieved that goal? While it is still too early to be sure, given the vagaries that have dominated economic forecasts in recent years, I do not think the announced measures add to the prospect of the Reserve Bank of Australia raising interest rates further.

Read more: Budget 2023: Budgeting for tough times is hard – just ask Chalmers

The latest forecasts from the RBA, published last week after raising rates for the 11th time in 12 months, now assume that no further rate hikes will be needed to bring inflation back to the central bank’s target range of 2-3% by mid-2025. (RBA Governor Lowe has said taking this length of time is better than letting inflation fall faster at the cost of job losses.)

This suggests that the RBA will raise rates in June or July only if there is new evidence that inflation remains higher than expected.

How the budget may change the RBA’s mind

The only price increases resulting from the budget are higher prices for smokers, with tobacco taxes being increased by 5% per year for three years.

To prevent inflation from rising, the government has focused on fiscal measures that directly reduce the cost of essential goods and services for people on lower incomes, especially household energy bills (some households will save $500 a year) and medical costs (increase in bulk billing incentives and reduction in the cost of some drugs).

Treasury estimates these measures will directly reduce inflation by 0.75 percentage point in 2023-2024.

The main thing is how they affect the consumer price index.trimmed meanmeasure of underlying inflation. This excludes the 15% of prices that rise the most and the 15% of prices that rise (or fall) the least. The RBA often pays more attention to the trimmed average than the total CPI figure because it is less affected by temporary factors.

Energy and medical prices can end up between falling prices and are therefore excluded from the measure. Thus, the trimmed average size may have been lowered less than the head number.

On a more positive note, the high profile of these price cuts may do more to moderate inflation expectations. Because inflation, as Lowe has pointed out in all his warnings about stagflation, has a lot to do with psychology.

Philip Lowe, Governor of the Reserve Bank of Australia, addresses a business summit in Sydney on March 8, 2023.
Bianca De Marchi/AAP

What about those payments?

Households receiving higher social assistance benefits, such as unemployment benefit, single parental benefit, youth benefit and rent allowance, have more to spend.

Read more: Budget 2023 at a glance: major measures, cuts and expenditures

But not much, and the measures are aimed at those most in need. This contrasts with the cost-of-living measures taken by the previous government, whose temporary reductions in petrol duty and so-called “low and medium tax compensation” brought greater benefits to the well-to-do.

Treasury expects these measures to make only a modest contribution to total demand. Total household spending is expected to grow by 1.5% in 2023-2024. This will not be a significant source of inflationary pressure.

Read more: Budget spends a lot on support, but won’t make much of a difference to poverty

The budget papers’ forecast for inflation by June 2024 is 3.25%, slightly less than the RBA’s forecast of 3.5%. The forecast for June 2025 is 2.75%, compared to the RBA’s 3%.

It remains to be seen whether the RBA’s next set of forecasts will be closer to Treasury’s. These will be published in August, although the bank may be guided by them sooner.

If so, further rate hikes are less likely.

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