Reserve Bank expected to raise interest rates on Melbourne Cup Day amid inflation concerns

The Reserve Bank of Australia is expected to raise its cash rate on Tuesday, the day of the Melbourne Cup, marking a fifth increase in 2026. The move comes as inflation remains above the 2-3% target and the production side of the economy approaches full capacity, prompting concerns that demand could outstrip supply.

Economist Ross Gittins notes that while the government’s fiscal stance contributes to overall demand, the bulk of recent spending growth has come from the private sector. He argues that the key driver of inflationary pressure is a budget deficit – spending that exceeds tax revenue – rather than total government outlays.

Gittins suggests that resolving the tension between fiscal and monetary policy may require either curbing the deficit or raising taxes, particularly on high-income earners and foreign purchasers of Australian mineral and energy exports. He also criticises a recent policy to delay the impact of the Iran war on energy prices, calling it costly and ineffective.

"When the budget adds to demand while the Reserve uses higher interest rates to dampen demand, the two arms of economic management pull in opposite directions and it is up to the federal government to resolve the contradiction," Gittins wrote.

The commentary underscores that voters are likely to hold elected officials accountable for any further rate hikes, even as the Reserve Bank operates independently of government policy.