The shadow minister for finance Jane Hume said Treasurer Jim Chalmers is waging a war against the Reserve Bank of Australia (RBA) after the Treasurer recently said the RBA and its high interest rates are “smashing the economy”.
“With all this global uncertainty on top of the impact of rate rises which are smashing the economy, it would be no surprise at all if the national accounts on Wednesday show growth is soft and subdued,” Chalmers said ahead of the release of the latest economic growth figures on Wednesday.
Doing the media rounds on Monday, Hume accused the Treasurer of blaming “his handpicked replacement” for Philip Lowe, Michele Bullock, for high inflation.
“At some point, he’s got to turn the mirror onto himself and say, what is it that the government can be doing? What is it that I can be doing to bring down inflation? And it’s certainly not an expansionary budget,” Hume said.
“In fact, we’ve had three expansionary budgets delivered by Labor governments with an additional $315 billion in spending. And Michele Bullock herself has pointed out that public expenditure, that that government expenditure, is part of one of the drivers that’s causing inflation to stay higher for longer. And now we’re one of, we’re the only G10 nation that has core inflation high as now as it was in January.”
In her defence of the RBA, Hume said the central bank “can only respond to the inflation which it finds itself in”, adding that “the problem is the government isn’t doing its fair share of the heavy lifting”.
“It’s impossible to control inflation from opposition, unfortunately, but I can tell you that we would do things very differently indeed,” Hume said.
Prime Minister Anthony Albanese toed the party line while in Perth on Monday, insisting that “there’s nothing new in what Jim Chalmers has said”.
“He has said that consistently in the Parliament,” Albanese told the media.
“We’re very proud that we have seen inflation cut in half of what we inherited. It peaked back at the beginning of 2022. Inflation moderated to 3.5 per cent last week. On an annual basis, we want to see it moderate further. And one of the things that we’ve done as well, of course, is produced two budget surpluses.”
Pushed to either support or condemn the Treasurer’s choice of words regarding the extent of the RBA’s impact on the economy, the PM maintained that rate rises are designed to “dampen demand”.
“And the Reserve Bank have a role to play in monetary policy. Our job is fiscal policy to make sure we both want, have the same objective, of getting inflation to moderate. We, of course, have other jobs as well as the Reserve Bank governor has said, which is to look after people’s interests. And that’s what we’re doing. And that’s what we’re doing,” Albanese said.
Economists broadly expect Wednesday’s national accounts to show real GDP increased by a small 0.2 per cent on the quarter, which would see the annual rate dip to well below trend 0.9 per cent.
If these figures are correct, the annual rate of GDP growth, outside of the pandemic period, will be its lowest since the early 1990s recession.
In a note published this week, CBA’s economist, Gareth Aird, said “restrictive monetary policy has clearly worked to slow demand growth in the economy”.
“A lift in tax payable has also weighed on household purchasing power along with the effects of elevated inflation and rising mortgage repayments. The labour market is loosening as a result and inflation is moderating. This is all part of the RBA’s plan to stay on the narrow path and return inflation to the target band,” Aird said.
While a 0.9 per cent year-on-year rise in June quarter GDP is in line with the RBA’s forecasts, looking forward, economists expect a softer GDP profile over 2024–25 relative to the bank’s estimates.
Recession, too, is not out of the question, according to AMP’s Shane Oliver, who recently cautioned that the risk of recession in Australia now stands at 50 per cent.
According to the chief economist, a number of factors could send Australia over the edge, including the possibility that the RBA got it wrong,
“Central banks, including the RBA, may not have allowed enough for the ‘long and variable lags’ with which rate hikes impact growth and inflation and so overtightened or left rates too high,” Oliver said.
“Because central banks never know when they have raised rates enough to control inflation, they often go too far – resulting in recession. This was the case prior to recessions in Australia in the early 1980s and 1990s. While the RBA still faces inflation that’s too high, given the US experience, it should now be giving consideration to a cut in interest rates as it now risks much higher unemployment and inflation falling below target.”
While Oliver believes there is a high possibility that there may be a cut by year’s end, AMP’s official prediction is that the first rate cut will occur in February next year.
This decision was made on the grounds that “we don’t think the RBA would be confident enough to start cutting until then”, the economist said.
“In fact, I think they should be moving to cut, which is, of course, different to what I think they will do,” he told InvestorDaily last month.
