RBA says government spending fuels inflation but its influence is limited

Reserve Bank assistant governor Sarah Hunter said on Sunday’s 60 Minutes programme that government spending continues to add demand pressure, which is a factor behind Australia’s elevated inflation. She added that the central bank cannot direct government fiscal policy and that any discussion on spending should be resolved through the political process.

Hunter, who advises RBA governor Michele Bullock and sits on the monetary policy board, noted that households are bearing the brunt of high prices and that more rate hikes are likely before the end of the year. Four increases have already been implemented since February, and she warned that rising oil prices could push fuel and food costs higher again.

“We know people are feeling the pain, but we know interest rates work,” she said, adding that higher rates are intended to bring inflation down and eventually ease cost-of-living pressures.

She explained that the RBA’s strategy uses rate hikes to reduce household spending, thereby easing demand and helping to rebalance it with supply. The current cash rate of 4.6% is the highest since the Global Financial Crisis, and a further increase could add roughly $120 per month to repayments on a $750,000 mortgage.

“Knowing people risk losing their homes weighs heavily on the board,” Hunter said. “But inflation must come down for everyone’s good.”

Hunter emphasized that the bank’s role is not to tell politicians how much to spend, stating that such decisions belong to voters at election time. She expressed a hope that inflation could be forgotten once it is brought back to the target low and stable level.