The Reserve Bank governor will face renewed questioning over the role the federal government played in driving up inflation and forcing the central bank to lift mortgage rates for the first time in more than two years.
Michele Bullock, her deputy Andrew Hauser and other senior central bank officials will report to Parliament House in Canberra on Friday for their regular grilling by a committee of Labor, Liberal and crossbench MPs.
Since the Reserve Bank lifted the benchmark borrowing rate to 3.85 per cent on Tuesday, opposition MPs have bombarded Treasurer Jim Chalmers with accusations rising government spending is at fault for the resurgence in inflation.
Dr Chalmers’ mid-year budget update, released in December, projected Commonwealth spending to hit 26.9 per cent of GDP this financial year – the highest level since the 1980s, excluding the COVID-19 pandemic.
“And it is driving up inflation and it is driving up interest rates,” opposition finance spokesman James Paterson said.
“Until they can get a handle on spending, it’s going to hurt the Australian people.”
Some economists, including AMP’s Shane Oliver, Deloitte Access Economics partner Stephen Smith, EY chief economist Cherelle Murphy and Paul Bloxham of HSBC, say higher government spending has contributed to the Reserve Bank’s inflation problem.
Household spending recovered stronger than the Reserve Bank expected, boosted by three rate reductions in 2025 and income tax cuts.
With high public spending adding more fuel to the fire, the economy began to overheat.
The result was higher inflation.
“Basically, we are seeing aggregate demand, public and private, push up against the limits of growth, and that’s what we’re seeing in terms of inflation at the moment,” Ms Bullock said in her post-conference rate meeting on Tuesday.
Dr Chalmers has pointed out that, other than that brief mention of aggregate demand, Ms Bullock mainly attributed the inflation surprise to the unexpected acceleration in private demand.
“What we saw in the economy in 2025 was public demand growth making a smaller contribution to demand in the economy, and private demand growth making a bigger contribution to growth in the economy,” he said during question time on Thursday.
Public spending has fallen as a proportion of total demand, but that’s only because of the relative rise in public demand.
Short of a sudden jump in productivity growth or a reduction in public spending, it will continue to crowd out the private sector and put pressure on the Reserve Bank to raise interest rates further to bring inflation under control.
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