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Australia will avoid recession, according to Treasurer

Published 07/08/2024, 10:13 am
Updated 07/08/2024, 10:30 am
© Reuters.  Australia will avoid recession, according to Treasurer
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Reserve Bank of Australia (RBA) governor Michele Bullock has indicated that interest rate cuts will likely not occur until next year and revealed serious consideration for an interest rate hike on Tuesday.

The RBA placed part of the blame squarely at the feet of the Federal Government, acknowledging that government spending is contributing to prolonged inflation. The development challenges Treasurer Jim Chalmers’ assertion that his budget strategy was aiding the RBA’s efforts.

The central bank increased its underlying inflation forecasts and stated that Labor’s energy rebates would not expedite the reduction of the current 4.35% cash rate. In its latest quarterly statement, the RBA also revised up its economic growth forecasts.

This stronger economic outlook is attributed to ongoing spending and recent announcements by federal, state and territory governments.

“Make no mistake: inflation is still too high, and the board does remain concerned about the ­degree of excess demand in the economy,” Bullock said.

“What we can say is that a near-term reduction in the cash rate doesn’t align with the board’s current thinking.

“I understand that this is not what people want to hear.”

Treasurer defends inflation approach

While the Treasurer welcomed the RBA’s decision to keep interest rates on hold, further comments were contrary to the RBA’s thinking.

Dr Chalmers said he recognised cost-of-living pressures on families, but noted “the progress we’ve made on underlying inflation”.

He told the ABC, the government was not anticipating a recession, despite the bloodbath on the Australian stock market this week that saw $100 billion wiped from the ASX.

"The way that the Reserve Bank forecasts and accounts for our cost of living help is the same way that the Treasury accounts for that, and the point that’s been lost since yesterday’s decision is that the Reserve Bank’s near-term inflation forecasts are better, not worse, and that’s because of the design of our cost of living policies," he said.

"What the ABS has shown in recent inflation data is that the way that we’re delivering our cost of living help is putting downward pressure on inflation and that is our objective."

The Treasurer rejected the RBA’s claim that budget spending was fuelling inflation.

"Budget spending is not the primary determinant of prices in the economy but we can be helpful and we are being helpful. With the design of our cost of living policies which help us get back to targets sooner."

Dr Chalmers also defended the government's energy rebates and rejected claims they had limited success in pushing down interest rates.

Will cost of living pressures be driven down?

According to Dr Chalmers, government policies are making the RBA’s job easier and subsidies are helping to drive down inflation below 3%.

However, the RBA forecasts headline inflation to increase from 2.8% in June next year to 3.7% in December as energy rebates conclude.

Opposition Treasury spokesman Angus Taylor expressed concern, noting that it was troubling the RBA had "extended the timeframe it’s going to take to get back to the target level of inflation".

“We heard before the budget, the Treasurer tell us that the ­Reserve Bank has got their forecast completely wrong because they hadn’t seen the budget,” Taylor said.

“Well, they’ve seen the budget now, and they’ve increased their forecasts for inflation, and they’ve said it’s going to take longer to get back into the range and to get back to target.”

The RBA maintained the interest rates at 4.35%, with Bullock indicating that increased government spending, a robust labour market and anticipated growth in household consumption — boosted by stage three tax cuts — contributed to recent data suggesting that inflation will take longer to return to the 2-3% target range.

The RBA’s quarterly statement on monetary policy highlighted that the central bank’s economists have a more hawkish outlook on inflation and interest rates compared to the market consensus.

Read more on Proactive Investors AU

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