Treasurer says rates pain ‘temporary but but won’t dis­appear overnight’

Jim Chalmers says inflationary pressures driving up interest rates are “temporary but won’t dis­appear overnight”, with economists predicting the RBA to lift the cash rate by 0.5 percentage points.

Federal Treasurer Jim Chalmers is focused on growing the economy without adding to inflation. Picture: Martin Ollman/Getty Images

Jim Chalmers says inflationary pressures driving up interest rates are “temporary but won’t dis­appear overnight”, with economists predicting the Reserve Bank board will lift the cash rate by 0.5 percentage points when it meets on Tuesday.

Ahead of the October 25 budget and updated economic forecasts from the RBA this week, the Treasurer said he was focused on growing the economy without adding to inflation and providing responsible cost-of-living relief.

After a run of interest rate hikes to combat soaring inflation, Dr Chalmers said “we know how tough this is for Australians, with the average family already paying around $220 more each month on their mortgage since before the election”.

“We don’t pre-empt the decisions of the independent Reserve Bank but the governor (Philip Lowe) has flagged further rate rises and the market expects another increase this week,” he said.

“Our inflation challenge is primarily but not exclusively global, and it’s temporary but won’t disappear overnight.

“Our economic plan is about responsible cost-of-living relief, growing the economy without adding to inflation, addressing supply chain issues which are pushing up prices, and trimming the budget of Coalition rorts and waste.”

Under its strategy to normalise monetary conditions, the RBA board is expected to hike its 1.35 per cent benchmark cash rate on Tuesday, with further rises projected in the December quarter as inflation peaks at 7.75 per cent.

Some economists are predicting less aggressive rate hikes though expectations remain that contingent on economic settings, the cash rate could reach 2.5 to 3.5 per cent by early next year, where it would likely remain across 2023.

Dr Chalmers said while some Australians had built resilience into their household budgets to get ahead of their mortgage repayments, “a lot of people haven’t”.

“A lot of people don’t have those buffers in their household budgets. And even if they’re not homeowners dealing with rising interest rates, the inflation problem itself really punishes people who are the most vulnerable.”

After the government released updated Treasury forecasts last week, the RBA will unveil its economic projections on Friday amid growing pressure on consumer confidence and calls from business leaders for greater certainty.

Economist Chris Richardson said the RBA would consider various indicators, which show that the longer-term economic threat to Australia was looking “less dangerous”.

Mr Richardson said the central bank must be careful in its messaging to Australians, with some households “confused about where things are going”.

“It doesn’t help that the RBA has not been the best communicator. They are trying to lift their game. You’ve also got a new government that to some extent wants to tell Australians that they’re on the job … but we don’t want to talk ourselves into going backwards,” he said.

Economist Chris Richardson.

With forecasts for jobs, national income and the near-term budget showing less dire outlooks, Mr Richardson said improving consumer confidence as financial and commodity markets grew “more comfortable with the inflation outlook” was crucial.

As countries including Australia flag less aggressive interest rate jumps, Mr Richardson said the RBA would take “some comfort” in global trends that point towards recovery into next year.

Australian Industry Group energy adviser Tennant Reed warned of a dire outlook for energy costs, which would flow through the economy.

“It’s looking worse and worse. While there are signs some other inflationary pressures may be starting to recede, the energy piece of this locally and globally looks like it will be a really serious concern on so many fronts – impacting on the consideration of the RBA,” Mr Reed said.

“We’ve emerged more or less from the acute period where the electricity market had to be suspended, but we’re still stuck with incredibly high prices for electricity and gas. The factors pushing those up are going to stay.”

With global coal and LNG crises fanned by Russia’s invasion of Ukraine, Mr Reed said the local gas price had jumped from $3-4 a kilojoule to more than $50 a kilojoule.