Australian interest rates are expected to rise to 4.6 per cent this week as politicians argue over whether overseas conflict or government spending is driving persistent inflation.
The Reserve Bank of Australia will begin a two-day meeting on Monday, with its decision due on Tuesday. The increase would take borrowing costs to their highest level in 15 years.
Deputy Prime Minister Richard Marles said the conflict in the Middle East was the main cause of the latest inflationary pressure, pointing to higher fuel prices and their effect on economies around the world.
“We’ve seen that play out at the petrol bowser, but we’re also now seeing it in terms of global inflation and that’s being experienced in advanced economies around the world,” he told ABC’s Insiders programme on Sunday.
Petrol costs are expected to push Australia’s headline inflation rate from 3.5 per cent to 4 per cent when figures are released by the Australian Bureau of Statistics on Wednesday. The United States, Europe and Japan have all raised interest rates in response to higher fuel prices since the RBA last met in August.
Opposition frontbencher James Paterson disputed the government’s explanation, arguing that domestic spending was placing pressure on prices.
“The government always has an excuse for why inflation is high and likes to point to external factors … (they are) spending at stimulus levels,” he told News24.
“Another rate rise will be a body blow for many households and small businesses and the government has done very little to deal with it,” he said.
Budget deficit expected to beat forecast
The political dispute comes as the expected result for the 2025/26 budget is likely to give the government a stronger outcome than forecast in May.
Labor predicted a deficit of about $28.3 billion, an improvement of $8.5 billion on its December forecast and around $14 billion better than the projection made in March. That would still represent a considerably larger shortfall than the previous year’s final result, when the deficit was just under $10 billion for 2024/25.
Meanwhile, pressure from higher borrowing costs is being reflected in the property market. Auction clearance rates, a leading indicator of house prices, fell to a preliminary 10-week low of 50.3 per cent on Sunday, according to housing data firm Cotality.
National median property prices have fallen 3.6 per cent since their cyclical peak in March. The decline has followed the removal of tax concessions in the May budget and three consecutive interest rate rises, which have weakened buyer confidence.
RBA governor Michele Bullock has stressed that interest rate decisions are not intended to target house prices. Economists have nevertheless linked falling property values with tighter consumer spending, which could help bring inflation down.
