The bank,which held the official cash rate at 4.35 per cent following its meeting on Tuesday,sharply raised its inflation forecasts and downgraded its. Inflation,,is expected to lift to 3.8 per cent and remain at that level until the end of the year.
RBA governor Michele Bullock says she hopes the bank doesn’t have to raise interest rates again but “if we think we have to,we will”.Louie Douvis
RBA governor Michele Bullock said the board believed interest rates were in the right place to get inflation back within its target range of 2-3 per cent next year,but warned they could go up if price pressures failed to abate.
“I hope that we don’t have to raise interest rates again. Having said that,if we think we have to,we will,” she said.
“What we are really trying to do is slow things enough to bring inflation down without tipping the economy into a recession.”
Higher petrol prices and the stronger jobs market were the main contributing factors to the lift in the inflation outlook.
Bullock revealed her shock at the price when fuelling up her own vehicle recently,saying people should be prepared for a “bumpy path” to bring down inflation.
Apart from increasing its inflation forecast,which just three months ago was expected to fall to 3.3 per cent by mid-June,the bank now tips economic growth will slump to just 1.2 per cent.
While growth slows,the jobs market is expected to remain strong. Unemployment,,is forecast to gradually lift to 4.3 per cent over the next two years.
Real wages,which have started to grow after falling for almost three years,are tipped to slow in the coming months due to the higher inflation outlook and a gradual weakening in wage increases for workers.
Chalmers said the federal government understood many Australians were doing it tough and the May 14 budget would focus on easing cost-of-living pressures.
“Our main focus in the near term remains easing inflation and helping relieve cost-of-living pressures,” Chalmers said.
“The May budget will be carefully calibrated to the economic circumstances,striking the right balance between getting inflation under control,easing cost-of-living pressures,supporting sustainable growth and building fiscal buffers in an uncertain global environment.”
Shadow treasurer Angus Taylor said the government needed to rein in spending.
The Reserve Bank of Australia has held the cash rate at 4.35 per cent.
“If the Reserve Bank has the foot on the brake,it’s … because the government has had its foot on the accelerator and,frankly,what you end up with is a situation where you wreck the engine,” he said.
“We need a budget next week that fights inflation first. Until you beat inflation,the rest simply can’t follow,and this government has consistently failed to put in place the policies that beat inflation.”
While the bank upgraded its inflation forecasts,they do not take into account the impact of policies that are expected to be announced in next week’s budget,such as an extension of electricity subsidies. Without the subsidies,electricity prices – which have increased by 3.9 per cent nationally since June last year – would have climbed 17 per cent.
Pressed on the inflation threat posed by the budget,Bullock said Chalmers had made public comments that showed he was focused on bringing down inflation.
“I think they[the government] are all conscious that they want to help us beat inflation so they don’t want to try and add to inflationary pressures,but we’ll just have to see what the budget comes out like,” she said.
KPMG chief economist Brendan Rynne said all eyes would now be on the budget.
“But what we really need now is for the federal budget not to add to aggregate demand – it should be neutral,or if possible,even slightly contractionary,” he said.
“A budget which lets loose the purse strings will simply see fiscal policy pressing even harder on the accelerator while monetary policy is pushing on the brakes.”
Financial markets are pricing in one more rate rise this year,although the Reserve Bank noted most economists expected a first interest rate cut in either December or early next year.
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