Markets put Melbourne Cup day rate-hike odds at nearly 60%
Australian Treasurer Jim Chalmers will use a Friday morning speech to flag that the country’s mid-year budget update in December will project weaker growth and slightly higher unemployment, as elevated interest rates and persistent inflation continue to weigh on the economy.
According to speech extracts seen by Guardian Australia, Chalmers plans to say: “higher inflation is putting people under pressure, tighter monetary policy is weighing on domestic activity, and we can see that in the softening of the labour market.” He will add: “Higher interest rates and higher inflation are likely to mean softer growth and slightly higher unemployment.”
“Treasury is in the process of revising all the numbers for the mid-year update,” Chalmers will say, according to the extracts.
The Guardian assessed that the Albanese government was already suffering the fallout from its ambitious tax reforms and that the deteriorating economic situation would be a further blow to Labor and Chalmers’ popularity into the new year.
The speech comes two days after a senior Reserve Bank official indicated the potential for another interest rate increase in under two weeks. Financial markets on Thursday lifted the probability of a Melbourne Cup day rate hike to nearly 60%, according to ANZ.
The intervention lands against a softening labour market backdrop. Jobs data released last week showed unemployment reached 4.7% in September — the highest in nearly five years.
The Guardian said Australian households were deeply pessimistic about the outlook. Challenger chief economist Jonathan Kearns said, “things have to get worse before they get better.” He also said: “The unemployment rate will increase further from here, and we are yet to see the full decline in housing prices, so they are two pretty high-profile things that will impact how people feel about the economy.”
Kearns noted that the full impact of the Reserve Bank’s four interest rate increases this year has yet to flow through the economy — and that was before the prospect of a fifth.
“We could be seeing unemployment at 5%, and that will be a difficult threshold for the government,” he said.
ANZ economists said on Thursday they now expect capital city home prices to eventually fall by 13.5% — a record peak-to-trough decline — before regaining some ground in 2028.
Sally Auld, chief economist at NAB, agreed the coming months would be difficult. “The next six to nine months will be pretty challenging,” she said.
“Growth needs to slow. The RBA is facing an inflation challenge that’s worse than they thought it would be as recently as August,” Auld said. She added: “Hopefully by that point we should have lower inflation than we have today.” “That would be a step in the right direction.”
The Guardian projected that, by this time next year, the economy should be in smoother waters, contrasting that outlook with the near-term difficulty.
The Guardian said the continuing Middle East conflict could keep fuel costs high for motorists through the festive season and summer holidays.
Kearns said Chalmers’ policy options were limited for now, as any additional cost-of-living relief threatened to exacerbate the inflation challenge.
“The challenge is that the government has been criticised, and probably fairly, for contributing to inflation through high government spending,” Kearns said. “But if they pull back on government spending to reduce inflation, they will be gonged for contributing to the rise in unemployment.”
The Guardian said the government expected economic conditions to improve before the 2028 federal election.