Time for everyone to tighten belts

Reserve Bank governor Michele Bullock has asserted her independence and lifted the cash rate against the political interests of Jim Chalmers, who now must get the message that he still has work to do to assist the RBA in the inflation fight. As the International Monetary Fund has outlined, this will involve cutting government spending to make room for the productive economy. It is a big dilemma for a government that wants to lift wages, build houses, promote green ideals and provide higher levels of aged care, childcare and the National Disability Insurance Scheme. Together with the results of the latest Newspoll that show more than three-quarters of voters want the government to cut energy prices, reduce spending and cut taxes rather than dole out cash to the lowest paid, this presents a difficult challenge. But it is one that must be faced. Pushing austerity on to state governments, where it also is badly needed, is not a complete solution.

There is a chance that global events may help ease inflation but the opposite is also true. Ms Bullock made it clear that the RBA would continue to be guided by the numbers, and the numbers show that while inflation in Australia has passed its peak it is still too high and is proving more persistent than expected a few months ago. Last week, the Federal Reserve felt confident to continue the pause in rates in the US, but at 5.5 per cent the rate is more than a full percentage point higher than the RBA’s new rate of 4.35 per cent.

Tuesday’s increase of 25 basis points was widely expected and clearly against the government’s wishes. The federal Treasurer made his views known but insisted it was wrong to say he was telling his new RBA appointee what to do. By making the comments he did, Dr Chalmers gave some market players a sense that Ms Bullock was being pushed into a corner. But Tuesday’s decision again asserted the board is prepared to do whatever it takes to get inflation back within the target zone.

Borrowers now will have to absorb another round of rate increases from the banks and it is possible more are in store. Ms Bullock says there are still significant uncertainties around the outlook: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks.” Risks inevitably will include the actions of government.

This is the cost-of-living crisis that voters feel has been left largely untended. The warning sirens are blaring that it is time for everyone, government included, to tighten their belts further.