RBA downplays role of government spending in boosting inflation | Economic policy

Reserve Bank of Australia Governor Michele Bullock downplayed the role of government spending in high inflation, citing consumer spending and the economic slowdown in China as factors with a greater impact on Australia's economic performance.

“I want to be clear that public demand is not the most important thing,” Bullock told the House Commerce Committee on Friday. Instead, she pointed to consumption, housing and trade as “the big shifts that will affect us over the next year or so.”

Bullock's comments come 10 days after the RBA left the benchmark interest rate unchanged for the sixth consecutive month. Bullock warned that a rate cut was unlikely this year. A week ago, she also said the bank would not hesitate to raise the rate if annual inflation did not get on track to reach its 2-3 percent range.

The RBA has raised its forecasts for federal, state and local government spending growth to 4.3 percent by December and 4.1 percent by June next year, up from 1.5 percent and 2.1 percent growth three months earlier, leading some to speculate that the central bank's efforts to fight inflation were being undermined by public sector profligacy.

Three months earlier, the bank had forecast spending growth of 1.5% and 2.1% respectively, leading some to speculate that the bank's efforts to curb inflation were being undermined by public sector profligacy.

Still, inflation remains “too high” and its decline from an annual peak of 7.8 percent at the end of 2022 has been “slow,” Bullock said. “Based on what the board currently knows, it does not expect to be in a position to cut interest rates in the near future.”

Among the threats to the country's economic development, China's weak growth is “a risk that is very relevant to us,” Bullock said.

While China was by far Australia's biggest trading partner, it also had a crucial influence on the prices of commodity exports, particularly iron ore. Massive overbuilding – many cities have completed so many apartments that they could meet years' demand – has dented consumer sentiment, but also slowed production in steel mills and other sectors of the economy.

“This is something we are watching very closely because developments in China can have a major impact on the development of our trade and therefore on our growth,” she said.

RBA officials also downplayed a rise in bankruptcies as companies struggled with higher interest rates. The recent increase was due to “absolutely historically low levels” during the pandemic, Bullock said. “If you look at the trend of bankruptcies over time, we're not even back to where we were trend-wise before the pandemic.”

Deputy Governor Brad Jones said the construction sector was “particularly hard hit” by the rising number of company bankruptcies, but these tended to be very small companies with “low single-digit numbers of employees.”

There has been “some leveling off of pressures in the construction sector” over the past six months, Jones said, but noted that pressures are increasing in the arts, hospitality and some segments of retail.