Treasurer predicts inflation to ease faster than expected, fuelling rate cut hopes

While the Treasurer admits the inflation fight “isn’t finished yet”, there’s hope coming – and it could have major implications for homeowners, too.

Treasurer Jim Chalmers has revived hopes of an interest-rate cut later this year with a bullish prediction that inflation could be back within the Reserve Bank’s 2 per cent to 3 per cent target band by Christmas.

As he prepares to hand down Tuesday’s federal budget, the Treasurer will reveal on Monday that the government’s new inflation forecasts are lower than those issued by the Reserve Bank of Australia.

And while there will be cost of living relief in the budget, he’s insisted it won’t fuel inflation and further rate rises.

“We need to engage in this inflation fight because it’s not finished yet, but we need to do that in a way that doesn’t smash the economy. It won’t be a slash and burn budget because people are doing it tough and the economy’s soft,” the Treasurer said.

Jim Chalmers hopes Australia could be back in the 2-3 per cent target range for inflation by Christmas.

Federal Treasurer Jim Chalmers has insisted cost of living relief won’t fuel inflation. Picture: NCA NewsWire / Martin Ollman

“Our budget will be part of the solution to cost-of-living pressures, not part of the problem.”

While the Treasurer is not promising a rate cut, the independent RBA has made it clear that a rate cut won’t happen until inflation is under better control.

As day follows night, any faster than expected fall in inflation will fuel hopes that relief is on the way for homeowners.

Treasury figures to be released on Monday will show inflation is expected to drop to 3.5 per cent this financial year – slightly below the RBA’s forecast of 3.8 per cent.

The budget predicts inflation will then continue to decrease to 2.75 per cent in 2024-25.

But that’s not what the RBA has been predicting as recently as last week, when it forecast inflation would be 3.2 per cent by June 2025.

That’s still outside the RBA’s target range of 2 to 3 per cent.

Shoppers have been feeling the pinch in the cost of living crisis. Picture: NCA NewsWire / Gaye Gerard

Speaking on Sky News on Sunday, Dr Chalmers said RBA governor Michele Bullock’s forecasts do not take “the budget into consideration”.

In doing so, he suggested that was the reason for the discrepancy between Treasury’s forecasts which were calculated with the impact of the budget in mind.

“It’s just a function of timing, not a function of opinion. The other point that is important to remember is even with that inflation figure that we got for the most recent quarter; we are still travelling better in annual inflation than we expected in the mid‑year update in December,” he said.

“We’re actually ahead of that. The near-term Reserve Bank forecasts are broadly consistent with what we thought in December as well. We’re making progress in the fight against inflation, but it’s not mission accomplished because people are still under the pump and that’s why inflation’s a big focus of the budget.”

Speaking on Sunrise, Barnaby Joyce questioned whether the government knew more than the RBA.

The RBA’s target range for inflation is between 2 and 3 per cent. Picture: NCA NewsWire / Max Mason-Hubers

“Do you think the RBA got it wrong with their PhD’s and all their staff and the Treasury got it right and Labor got it right?,’’ he asked.

Labor frontbencher Tanya Plibersek fired back.

“There are a few PhDs in the Treasury too, Barnaby,’’ she said.

Mr Joyce said Labor had a PhD in politics, not economics.

“The promises are falling to the ground like the leaves in autumn,’’ he said. “The question everyone has to ask themselves is this. It is their third budget. Is your life better now than it was when the Labor Party came into power and I think the answer is quite simple.”

The RBA kept official interest rates on hold at 4.35 per cent last week but offered a grim prediction that inflation could rise from 3.6 per cent to 3.8 per cent later this year.

The Treasurer has hinted that further assistance to households, such as electricity subsidies could be delivered in the budget, which will reduce cost pressures by about 0.5 percentage points over the next six to 12 months.

Originally published as Treasurer predicts inflation to ease faster than expected, fuelling rate cut hopes