Reserve Bank under fire as it prepares for Senate hearing on interest rates

Reserve bank of Australia boss Michele Bullock has delivered a warning on how government spending could impact interest rates.

Central bank executives are facing a parliamentary grilling as the government takes aim at inflation, interest rates and soaring house prices.

The hearing comes at a time when house prices have hit a record high, rate cut hopes have fallen and inflation has picked up.

RBA governor Michele Bullock declined to make an opening statement.

High government debt could lead to higher interest rates

Initially pressed by James Paterson Ms Bullock was repeatedly asked if a higher government spending would mean interest rates needed to be higher.

Australia’s debt is set to pass $1 trillion in the coming months, with a forecast yearly deficit of $42bn.

“All other things equal, if there are less savings in the economy and that includes by the government as well as private sector and at the same time investment doesn’t come down then that would put upward pressure on the neutral rate,” she said.

The RBA governor says it is possible but it comes with caveats.

“I emphasise that there’s domestic factors here, but there’s also global factors … we don’t control global factors,” she said.

Ms Bullock went on to say the inflation which is above the RBA’s target ban had surprised the central bank but the unemployment rate was in line with expectations.

“Correct me if I’m wrong … that inflation has been higher than your forecasts and Treasury’s. is that right?” asks Senator Paterson.

“Certainly inflation has priced on the upside. The unemployment rate hasn’t,” says Ms Bullock, noting unemployment is “pretty much” as expected.

More to come