RBA chief Michele Bullock and treasurer Jim Chalmers spar over inflation as interest rates hold

The Reserve Bank has been forced to adjust its expectations following “higher than expected” government spending, casting a shadow over Treasurer Jim Chalmers’ claim Labor has made progress in the fight against inflation.

The RBA denied borrowers a reprieve and kept rates on hold at 4.35% for a 12th consecutive month on Tuesday, capping the window for a pre-election rate cut sweetener.

The decision not to cut rates, despite inflation trending back towards the RBA’s target, immediately became a political football as the bank also admitted it had underestimated the rise in government spending at all levels.

Dr Chalmers said the decision not to raise rates further reflected the impact of rate rises “already in the system” and the progress “we are making together”.

“Prices have not gone up since the last day of the Melbourne Cup. So it’s been a year since the rates last increased,” he said.

“And that reflects two things. First, the impact of the rate is already growing in the system. Australians are already having it pretty tough when it comes to dealing with these higher interest rates. And secondly, it reflects the progress we are making together in the fight against inflation.”

But shadow treasurer Angus Taylor said the reason rates had not yet been reduced was because the government was “so deep in its approach to this issue”.

He pointed to Labor’s $16 billion HECS-HELP debt cancellation announcement at the weekend as evidence.

“There is no such thing as a free lunch. . . This will either come with higher taxes or even more immediately with higher inflation. One way or another, it will be paid for by Australians,” he said.

“This is a government that has decided to play a political game, put bandages on bullet wounds and not deal with the root cause of the problem here.”

In the post-meeting press conference, RBA Governor Michele Bullock warned that while growth has now stalled, the economy is still too hot, with aggregate demand still outpacing aggregate supply.

She said she believed Dr Chalmers was “fully aware of the inflationary implications of his own policies”, adding that she expected federal and state governments to be “very aware of what is hurting people”.

However, the bank said government spending was likely to remain “robust” in the coming years.

Explaining why the bank underestimated public spending, she said it was because of new announcements that were not included in previous forecasts; time changes; and because of the decisions of state governments.

At its second-last meeting of the year, the RBA updated its core inflation forecasts, forecasting that its preferred price-setting measure – which strips out volatile prices and energy subsidies – is not expected to fall in the bank the bank’s target by mid-2025.

Headline inflation is expected to fall further from the current rate of 2.8% next year, but is forecast to rise to 3.7% by the end of 2025 unless the federal government extends its energy cuts.

It is then forecast to gradually decline to 2.5% by the end of 2026.

The bank said it would not start cutting rates until inflation was “sustainable” within its target range of 2-3%.

ANZ economists and AMP chief economist Shane Oliver maintained their view that rates could be cut in February.

Mr Oliver said the central bank had softened its tone slightly and appeared to have more confidence in the direction of inflation.

Investment bank HSBC still predicts a cut won’t arrive until the second quarter of 2025, but warned borrowers could be left waiting longer.

“We see an increasing risk that cuts will last even longer or that the RBA will miss the easing phase altogether,” the bank said.

The RBA also released its quarterly monetary policy statement on Tuesday, which cut growth forecasts and revised unemployment up slightly.