RBA interest rates: Government told to bring spending under control amid inflation bounce

The Federal Government has been warned to rein in spending and lay off the power bill rebates or it will worsen the risk of interest rate hikes hitting homeowners next year.

New price data last week sparked fresh concern about overheating demand adding pressure to the economy and cost of living, as core inflation lifted to 3.3 per cent in the year to October.

HSBC’s Paul Bloxham on Monday said tightening government spending could “help bring down inflation”.

An underlying deficit of more than $40 billion was budgeted for this financial year and the public sector’s share of the national economy — which also includes State and local governments — recently hit multi-decade highs.

Mr Bloxham said rising inflation, improving growth and an upswing in the housing market indicated the Reserve Bank’s interest rate position was “not restrictive”.

That means the RBA is supporting activity rather than acting as a brake.

“Fiscal policy tightening would now help. If that does not arrive, interest rates may have to be lifted sooner, rather than later,” Mr Bloxham said.

He pointed to huge growth in the care sector, and government demand driving almost 80 per cent of job creation through the two years to June.

There’s been speculation in recent weeks that thousands of Federal public servant jobs will be slashed to help ease pressure on the budget.

Power bill subsidies won’t help as the rebates “will free up more household income to spend on other things, and support core inflation, as it did previously”, Mr Bloxham said.

“In a fully employed economy that is operating at its capacity, increased public spending crowds out private sector activity,” he said.

“With inflation rising and now above the RBA’s 2-3 per cent target, there is a strong case for fiscal policy to tighten to help bring down inflation.”

Financial markets are pricing in a small chance of a rate rise by the end of 2026.

But Judo Bank’s Warren Hogan on Monday moved forward his prediction for a rate hike to May.

He also expects another move in August.

“Last week fundamentally changed the monetary policy outlook following the release of a much higher-than-expected inflation outcome for October,” Mr Hogan said.

He said nearly half of the items in the Australian Bureau of Statistics’s consumer price basket had increased by more than one per cent in the past three months.

“The key areas of concern for the RBA, housing and market services inflation, are showing no clear signs of slowing,” Mr Hogan said.