Highlights

  • RBA Assistant Governor Sarah Hunter acknowledged that government spending contributes to overall economic demand and forms part of the inflation outlook.
  • The RBA has implemented four interest rate increases during 2026 as it seeks to address domestic inflation pressures and external cost shocks.
  • Hunter emphasised the central bank's independence, explaining that decisions about government expenditure remain matters for elected policymakers.
  • Higher borrowing costs are affecting household consumption, business spending and housing activity, although the RBA has not identified widespread systemic mortgage distress.

Government expenditure has become an important consideration in Australia's inflation outlook as the Reserve Bank of Australia (RBA) continues to address the imbalance between economic demand and available supply.

In an interview published on 25 October 2026, RBA Assistant Governor (Economic) Sarah Hunter discussed how government spending contributes to demand, the effectiveness of higher interest rates and the economic pressures facing Australian households.

Hunter acknowledged that expenditure by both federal and state governments forms part of the RBA's economic assessments.

"Government spending is part of demand. It's contributing to demand," Hunter stated during the discussion.

Her comments highlighted the relationship between fiscal policy, economic activity and the RBA's efforts to bring inflation towards a sustainably low and stable level.

Why Government Expenditure Matters for Inflation

Government expenditure supports economic activity through infrastructure investment, public services, employment and other spending programs. However, it also contributes to aggregate demand alongside household consumption and private business investment.

When total demand exceeds the economy's capacity to supply goods and services sustainably, businesses may face additional pressure on available resources and production capacity.

Hunter explained that the RBA considers government budgets and expenditure announcements when preparing economic forecasts.

According to the Assistant Governor, the Australian economy was already experiencing a demand-and-supply imbalance before the latest external oil shock.

The RBA's interest rate increases are intended to moderate spending and bring demand into better alignment with supply.

However, Hunter did not specify how much of the current inflation challenge could be attributed directly to government expenditure compared with other components of demand.

Why the RBA Does Not Direct Government Spending

An important distinction raised during the interview concerned the separate responsibilities of monetary and fiscal authorities.

While the RBA determines monetary policy independently, decisions regarding public expenditure and taxation fall within the responsibilities of elected governments.

Hunter emphasised that the central bank incorporates fiscal decisions into economic projections without prescribing what governments should spend.

She also explained that institutional independence applies in both directions: monetary policy decisions remain separate from government direction, while the central bank avoids directing fiscal priorities.

This distinction matters because inflation outcomes reflect the interaction of interest rates, government expenditure, private demand and supply conditions.

Consequently, the RBA assesses the combined economic effects of these factors rather than treating government spending as a standalone determinant of inflation.

Four Interest Rate Increases Reflect Continuing Inflation Pressures

The RBA has implemented four interest rate increases during 2026, according to Hunter's remarks.

Despite these adjustments, she indicated that more time was required for higher borrowing costs to influence economic activity and inflation.

Monetary policy operates through several channels. Higher interest rates increase debt-servicing costs for variable-rate borrowers, influence saving decisions and raise financing costs for businesses.

Hunter explained that higher rates may encourage households to reduce discretionary expenditure while causing companies to reconsider investment projects.

These changes can moderate overall demand, although their effects emerge gradually and vary across sectors and households.

External Oil Prices Add Another Inflation Challenge

Alongside domestic demand pressures, the Australian economy is facing higher costs associated with the international oil shock.

Hunter identified rising petrol and diesel prices as immediate consequences, with additional effects beginning to emerge throughout supply chains.

Construction materials and renovation expenses were among the areas mentioned during the discussion.

These developments create a challenge for monetary policymakers because international energy disruptions can raise production and transportation costs even as domestic demand slows.

The RBA's concern extends beyond the initial price increases to the possibility that these pressures become more persistent across the economy.

Housing Market Weakness and Household Financial Stress

The interview also addressed the impact of higher interest rates on Australia's residential property market.

Hunter acknowledged that rising borrowing costs have moderated housing transactions and prices, consistent with an important transmission channel of monetary policy.

However, she distinguished reduced property market activity from widespread financial distress.

According to Hunter, the RBA had not observed systemic evidence of large numbers of mortgage holders being forced to sell their properties or falling behind on repayments.

She nevertheless recognised that some households were experiencing substantial financial difficulties.

The central bank continues to assess these risks alongside its objectives of price stability and full employment.

Key Insights

The RBA's latest discussion illustrates how government expenditure, private demand and international cost pressures interact in shaping Australia's inflation outlook.

While four interest rate increases have been implemented during 2026, the central bank considers that domestic demand remains above sustainable supply capacity.

Hunter also indicated that the RBA is not seeking to generate a recession and has not identified one in its current economic indicators.

Future inflation data, household consumption trends, government spending developments and the transmission of higher energy costs will remain important considerations in assessing Australia's monetary policy environment.

Q1. Does government spending contribute to inflation in Australia?

Government spending contributes to aggregate demand. When overall demand exceeds sustainable supply capacity, it can add to inflation pressures.

Q2. How many interest rate increases has the RBA implemented in 2026?

According to Assistant Governor Sarah Hunter's interview published on 25 October 2026, the RBA had implemented four interest rate increases during the year.

Q3. Why does the RBA consider government budgets?

The RBA examines federal and state government expenditure plans because they influence economic demand and form part of the central bank's forecasts.

Q4. Is the RBA expecting an Australian recession?

Hunter indicated that a recession was not part of the RBA's baseline outlook and that available indicators had not shown evidence of one.

Q5. What factors could influence Australia's inflation outlook?

Domestic spending, government expenditure, borrowing costs, international oil prices and supply-chain pressures are among the factors affecting inflation conditions.