Treasurer defends government response to inflation as home loan debt hits $2.5 trillion
Treasurer Jim Chalmers has pointed to the Middle East conflict as the primary driver of inflation and interest rate pressures as a fourth rate hike from the Reserve Bank looms.
Most economists predict Australia’s cash rate will rise to about 4.6 per cent on Tuesday, a 25-basis-point jump, with the federal government coming under increasing pressure to curb spending to slow inflation that remains hot.
Treasurer Jim Chalmers has defended the government’s response to the current inflationary and economic pressures. Today
However, the treasurer defended the government’s response to difficult economic headwinds facing Australia and insisted spending had remained responsible.
“We do have an inflation challenge in our economy, I think that’s self-evident,” Chalmers told Today on Tuesday.
“That’s made much worse by the developments in the Middle East, this long war which is pushing up global oil prices and flowing through to all of our economies, pushing up inflation and interest rates right around the world.
“We’re managing the budget in a responsible way, we’ve got spending as a share of the economy down considerably.”
He said government spending had fallen to about 26 per cent of gross domestic product (GDP) from 31 per cent when Labor came into government.
That high under the former Coalition government came in 2020 at the height of the COVID-19 pandemic.
“I accept responsibility for my part in the fight against inflation,” Chalmers said.
The expected rate hike would mean Australia’s cash rate would be among the highest in the world and higher than other developed economies.
Chalmers said analysing the cash rate on its own was not a fair comparison and didn’t consider other factors in the Australian economy.
“A lot of those countries have got slower economic growth than we do, they’ve got slower employment growth than we do, some of them have got higher unemployment than we do, so you have to make the full comparison,” he said.
“Yes, we have our fair share of challenges in Australia, but we’ve got a lot going for us as well, even as the global climate is so volatile and uncertain.”
The treasurer said he sympathised with Australians doing it tough, saying he understood the true cause of rate rises would be cold comfort to millions.
“I know that doesn’t make it easier for people who are bracing for an interest rate hike this afternoon,” he said.
“I know that doesn’t take the sting out of it, but it’s a fact.”
The $2.5 trillion anchor
No matter the main cause of inflation, the expected cash rate hike on Tuesday will see interest rates rise to a level Australians have not seen since 2011.
That sounds bad but the truth is worse.
Homeowners now have about 2.5 times more debt than 15 years ago, making the inevitable rise significantly more painful.
RBA governor Michele Bullock talks to the standing committee on economics in Canberra on Friday. Alex Ellinghausen
Canstar said home loan debt had risen by 138 per cent since 2011 to hit $2.51 trillion, driven mostly by surging property prices.
Data insights director Sally Tindall said although the cash rate was returning to the 2011 level, borrowers were lugging around more than twice the debt.
The expected increase on Tuesday would add $91 a month to a typical $600,000 mortgage with 25 years remaining.
“The true pain is in the cumulative impact,” Tindall said.
“Across what is likely to be at least four rate rises for the year, this borrower has to fork out an extra $364 a month compared to what they were paying at the start of the year.”
9News finance editor Chris Kohler said the market was predicting a 91 per cent chance of a rate hike and almost all economists agreed.
“A rate rise tomorrow (Tuesday) would be up there with the most painful we’ve ever had,” he said.
Thursday’s surprise jump in the unemployment rate to 4.6 per cent – when it had been expected to stay flat at 4.5 per cent – is unlikely to sway RBA chief Michele Bullock or her board’s hand given she has pointed to the “tight” labour market as a problem.
“I think between 4.5 and 5 [per cent] will probably take enough heat out of the labour market that it’ll ease pressure on inflation,” she said last Tuesday.
A September hike would push Australia’s cash rate to the second-highest level among economies the International Monetary Fund ranks as advanced, passing Norway and trailing only Iceland.
Opposition to the RBA monetary policy board’s rate hikes has been rising amid criticism it is punishing mortgage holders for sins committed elsewhere.
Compare The Market’s economic director David Koch urged Bullock to call out government spending as a key driver of inflation, not households struggling to get by.
Compare The Market’s economic director David Koch urged her to call out government spending as a key driver of inflation James Brickwood
“A meaningful slice of the inflation your board is trying to contain is not being generated in a shopping centre. It is being set in a cabinet room,” he said last week, in an open letter to the RBA.
“Then there’s oil. I know fuel is front of mind for your board, and fair enough. But a petrol price shock is already a tax on every household.
“It strips spending power out of the economy without you lifting a finger. A rate rise won’t pump a single extra barrel, or fix a thing in the Middle East. It simply hits the same kitchen table twice.”
The latest inflation figures from July were 3.6 per cent on the RBA’s preferred trimmed mean indicator, still outside the target range of 2 per cent to 3 per cent.
After the bank’s August meeting, the bank predicted that target would not be reached until late 2027 but earlier this month Bullock suggested the RBA had overshot the forecast.
“Developments since then suggest that, although growth in the Australian economy is slowing, some of these upside risks to inflation appear to be materialising,” Bullock said at a parliamentary hearing, where she pointed to the Middle East conflict, the AI boom and extreme weather events as putting pressure on energy, food and tech prices.
Chalmers has repeatedly pointed overseas for the source of the problem, claiming his government had taken pressure off spending in the past two budget updates.
“Overwhelmingly, this inflation challenge that we have in our economy is because of what’s happening around the world, making our own domestic inflation challenge that much worse.
“Overwhelmingly, this inflation challenge that we have in our economy is because of what’s happening around the world, making our own domestic inflation challenge that much worse,” he told News24 on Monday.
Canstar predicts the average owner-occupier variable rate offered by banks will jump to 6.49 per cent but some may manage to keep it under the magic 6 per cent mark.
Tindall said the best thing struggling borrowers could do was look at negotiating their loan.
“Owner-occupiers who have let their loan sit on autopilot for years are likely to be on a rate that’s over 7 per cent after this next rate hike,” she said.
“However there is an antidote. By actively negotiating or switching to a competitive rate, which we estimate after another hike will be below 6.25 per cent for owner-occupiers, a borrower with a decent sized debt could potentially pocket thousands of dollars in savings in the next couple of years, even when factoring in switch costs.”
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