Housing minister Clare O’Neil is yet another federal minister spruiking the federal government’s role in bringing inflation down.
As we’ve been repeatedly told, getting inflation between the Reserve Bank of Australia’s target zone of 2-3% is the critical factor in seeing interest rates lowered.
As was revealed last week, Australia’s annualised headline inflation rate dipped into the target band for the first time in more than three years at 2.8%, largely due to government energy rebates that saw the price of electricity plunge by 17.3%.
Ms O’Neil told the Savings Tip Jar podcast it was “really good economic news”, making sure to highlight the government’s “important" contribution.
“We’ve been able to provide cost of living support to people in ways that bring inflation down – things like childcare supports, like energy bill relief, so this is a really delicate balancing act,” she said.
“I think anyone looking at the economic performance of our government, a million jobs created, inflation more than halved, two budget surpluses, tax relief for every single Australian household.”
It should come as no surprise Australia is due to head to the polls to elect a new federal government by May 2025.
RBA, government at implicit loggerheads
But headline inflation is not the figure the Reserve Bank considers in its deliberations on the cash rate, preferring the more telling trimmed mean figure, often referred to as underlying inflation, which came in at 3.5%.
In a surprise to no one, on Melbourne Cup Day, the RBA board chose to hold the cash rate at 4.35% with RBA governor Michele Bullock reiterating underlying inflation “remains too high”, saying “it will be some time yet before inflation is within the target range”.
In her post-meeting media conference, the ever-judicious Ms Bullock alluded to the many factors that may hamper this – higher household spending, a stronger-than-expected labour market, and public sector demand.
In its Statement of Monetary Policy (SMP), released with the cash rate decision on Tuesday, the RBA revised its public demand forecast to rise to 4.4% in 2025, up from its 4.1% forecast in the August statement.
The latest forecasts of public demand were revised down for the next two quarters before bouncing back over the next two.
| Public demand | Previous forecast | GDP | Previous forecast | |
|---|---|---|---|---|
| June 2024 | 3.6% | (4.0%) | 1.0% | (0.9%) |
| December 2024 | 4.0% | (4.3%) | 1.5% | (1.7%) |
| June 2025 | 4.4% | (4.1%) | 2.3% | (2.6%) |
| December 2025 | 3.7% | (3.0%) | 2.3% | (2.5%) |
Source: RBA
Ms Bullock said the revision considers the timing of project rollouts and future announcements by both federal and state governments.
Election year spending
The public demand forecast figures likely also take into account expected government spending in the run-up to the federal election.
This week’s promised $16 billion in student debt relief is likely to be a pre-cursor to many such voter-friendly announcements.
The federal government has hardly made a secret of its intention to run budget deficits for the next couple of financial years.
Its forecast deficit for the 2024-25 financial year is $28.3 billion, growing to $42.8 billion in 2025-26.
When asked about the impact of government spending in her post-meeting media conference on Tuesday, Ms Bullock said she believed the federal treasurer Jim Chalmers was aware of the situation.
“My reading — when I speak privately to the treasurer and when I hear him speak on television and radio — is that he's fully aware of the inflationary implications of his own policies," she said.
"He needs to be thinking about that. Because he — like me — understands that inflation is really what's hurting people at the moment."
Government holds the line
On Tuesday, Dr Chalmers didn’t address the public demand revision, choosing instead to tell federal parliament about the revised forecasts that see trimmed mean inflation easing faster than previously forecast.
The latest Statement on Monetary Policy now has underlying inflation reaching the mid-point of its target range – 2.5% - by the end of 2026, down from the previous forecast of 2.6%.
The previous SMPs saw the timeline for hitting the midpoint pushed out by a further six months.
RBA Trimmed Mean Inflation Forecast
| 2024 SMP | December 2024 | June 2025 | December 2025 | June 2026 | December 2026 |
|---|---|---|---|---|---|
| November | 3.4% | 3.0% | 2.8% | 2.7% | 2.5% |
| August | 3.5% | 3.1% | 2.9% | 2.7% | 2.6% |
| May | 3.4% | 3.1% | 2.8% | 2.6% | n/a |
| February | 3.1% | 3.0% | 2.8% | 2.6% | n/a |
Source: RBA
But Ms Bullock maintained her usual cautionary tone, refusing to “rule anything in or out” on interest rates.
The government may be spruiking the worst is behind us on inflation and interest rates, but the RBA has made it clear there is still many factors that could stall a cut to the cash rate.
The last RBA board meeting for the year will be held on 9-10 December with little expectation there'll be a surprise pre-Christmas rate cut.
The board will meet for the first time in 2025 on 17-18 February after the December quarter inflation data is delivered in late January.
The big bank economists all tip the RBA to make its first cut to the cash rate in more than four years at its February meeting.
But Ms Bullock has again reminded us, she and the board are decidedly more circumspect.
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