RBA holds interest rates steady ahead of federal budget
The Reserve Bank held interest rates steady at 4.35 per cent on Tuesday but did not rule out further increases as it warned that high petrol prices and a tight jobs market would push inflation higher in the coming months.
In bad news for the federal government before the May 14 budget, the Reserve Bank lifted its key forecasts for inflation, which is currently at 3.6 per cent.
RBA governor Michele Bullock. The Reserve Bank has lifted its key forecasts for inflation, which is currently at 3.6 per cent.Credit: Nine
The higher inflation forecasts put pressure on the government to restrain spending to keep rising prices in check.
According to its May statement on monetary policy, the bank now expects inflation to reach 3.8 per cent in June this year, above its previous forecast of 3.3 per cent.
“Higher petrol prices, the legislated end of energy rebates and stronger recent data will lift headline inflation in the near term,” the report said.
Rental inflation remains high – at 7.8 per cent through the year to March, according to the Australian Bureau of Statistics’ consumer price index – and the Reserve Bank expects it to stay elevated through to the middle of 2026.
“Tight rental market conditions across the capital cities will likely contribute to ongoing high advertised rent growth, which will in turn keep CPI rents inflation elevated,” the report said.
Treasurer Jim Chalmers said the federal government understood many Australians were doing it tough and next week’s budget would focus on easing cost-of-living pressures.
“Our main focus in the near term remains easing inflation and helping relieve cost-of-living pressures,” Chalmers said.
“The May budget will be carefully calibrated to the economic circumstances, striking the right balance between getting inflation under control, easing cost-of-living pressures, supporting sustainable growth and building fiscal buffers in an uncertain global environment.”
Shadow treasurer Angus Taylor said the government needed to rein in spending.
“If the Reserve Bank has the foot on the brake, it’s … because the government has had its foot on the accelerator and, frankly, what you end up with is a situation where you wreck the engine,” he said.
“We need a budget next week that fights inflation first. Until you beat inflation, the rest simply can’t follow, and this government has consistently failed to put in place the policies that beat inflation.”
The RBA board said demand – which is mostly consumer spending – remained out of sync with supply. And employment was still tighter than it believed was consistent with low and steady inflation and sustained full employment.
“The economic outlook remains uncertain, and recent data have demonstrated that the process of returning inflation to target is unlikely to be smooth,” it said.
While the board expects inflation to ease to the top of its 2 to 3 per cent target range by the end of next year, it remains concerned about the persistence of services inflation and expects inflation to rise in the near term, partially due to higher petrol prices.
“Inflation is, however, expected to decline over 2025 and 2026,” the board said.
The board reaffirmed its commitment to getting inflation down to its target range as a priority.
“Returning inflation to target within a reasonable timeframe remains the board’s highest priority,” the board said.
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“Recent data indicate that, while inflation is easing, it is doing so more slowly than previously expected and it remains high.
“The board expects that it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.
“The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame remains uncertain, and the board is not ruling anything in or out.”
The Reserve Bank expects the economy to grow at a slower rate than previously forecast, while unemployment is tipped to remain a little lower than predicted in February.
Financial markets are pricing in one more rate rise this year, although the Reserve Bank noted most economists expected a first interest rate cut in either December or early next year.
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An earlier version of this story contained incorrect inflation figures for December 2024 and June 2025.
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