Treasurer under pressure to fix budget after RBA lifts rates for first time in years

Pressure has piled on Treasurer Jim Chalmers to tighten spending and rev up the economy in the May federal budget as fears grow that the Reserve Bank will follow up its latest interest rate rise with further hikes.

The Reserve Bank on Tuesday lifted interest rates for the first time since 2023, up a quarter of a percentage point to 3.85 per cent and adding $100 a month to the repayments on a $600,000 mortgage. The nation’s biggest lender, the Commonwealth Bank, announced it would pass on the increase in full to its borrowers, and Westpac, National Australia Bank and ANZ Bank did the same on Tuesday evening.

The move, coming just six months after the bank last cut the cash rate, dominated the first day of parliament, with the Coalition goading Chalmers over the increase and what it would mean to millions of people with a mortgage.

Shadow treasurer Ted O’Brien said Chalmers had to take the blame for the increase, which could be the first of several this year.

“It is the direct consequence of Labor’s addiction to spending, which has kept inflation higher for longer and left the RBA with no choice but to keep tightening,” he said. “Australian mortgage holders are being punished because the government won’t show the discipline that families themselves have been forced to show.”

Chalmers, who admitted the rate hike would raise pressure on families and businesses, said claims that government spending was behind the move were rubbish.

“If you look at the Reserve Bank statement today, it doesn’t mention government spending,” he said. “It’s not a factor in the decision that they took today. In fact, they’ve gone out of their way to say that the upside surprise in inflation and the pressure on the outlook is coming from private demand.”

Reserve Bank governor Michele Bullock refused to say whether government spending was to blame for rising inflation, only noting that the bank looked at private and public spending together.

“I’m not going to comment on fiscal policy,” she said. “Governments have to supply services and build infrastructure. We take that as given, and together with private demand, look at whether or not it means inflation is going to be under pressure.”

But Bullock, who would not be drawn on whether further rate rises would be needed, said the key problem continued to be Australia’s poor productivity growth rate. The Reserve slightly downgraded its own modest forecasts for productivity over the next two years.

She said inflation pressures had lifted just as the economy was starting to recover.

“The economy is closer to its supply capacity than we previously thought, which means supply constraints are binding in some more sectors and it’s not taken much of a pick-up in demand to generate price pressures,” she said.

“Years of weak to no productivity growth is a big part of that story.”

Both Chalmers and Prime Minister Anthony Albanese have said the coming May budget will be focused on reducing inflation pressures through economic reform.

Cabinet secretary Andrew Charlton left the door open to overhauling property tax breaks such as the capital gains discount and negative gearing.

Asked directly if the government was considering those policies, Charlton told Sky News after the rate rise was announced on Tuesday that he would not “front run” the budget or rule anything in or out.

But in a sign the government could be mulling major changes economists have championed for ages, he said, “this will be a budget of reform”, repeatedly declining to shut down talk of winding down contentious tax breaks.

“The treasurer has said that in this budget we are going to do reform and repair. And what that means is attacking inflation from two different angles, attacking it from the budget repair angle, continuing to get budget savings,” he said.

The Reserve Bank’s board was unanimous in agreeing to the rate rise, and followed economic forecasts including inflation reaching 4.2 per cent by the middle of this year.

It expects inflation will not return to the middle of the bank’s 2-3 per cent target band until mid-2028.

In the short term, economic activity is expected to be higher due to consumers increasing their spending, while businesses are forecast to lift their investment expenditure.

Businesses have also been able to lift their profit margins over the past six months, according to the bank’s statement, adding to the nation’s inflationary pressures.

“That may be because strong demand enabled retailers to increase their prices by more than otherwise, following reports in the first half of 2025 that weak demand growth had limited their ability to pass on cost pressures,” it said.

Meanwhile, the unemployment rate, which has remained historically low at 4.1 per cent in December, is expected to be broadly stable over the near term before rising to 4.6 per cent by December 2028 as the economy slows.

Business Council chief executive officer Bran Black said the rate rise meant the government had to use the May budget to find savings and implement productivity-enhancing economic reforms.

“The upcoming budget must focus on disciplined spending and put new fiscal rules in place to ensure spending does not keep increasing as is currently forecast,” he said.

Deloitte Access Economics senior partner Stephen Smith said the fact that the Reserve Bank had sliced its forecasts for economic growth and real wage growth showed Chalmers had to use the coming budget to engage in real economic reform.

“If this is really as good as it gets for economic growth, then Australia has bigger problems than an interest rate rise,” he said. “The upcoming budget should be all about incentivising investment, especially by the private sector, to drive productivity.”

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