Reserve Bank Set for Third Rate Hike as Inflation Hits 4.6% and Government Spending Hits 40‑Year High

The Reserve Bank’s board meets Tuesday with a near‑certain consensus to lift the cash rate by 25 basis points, marking the third increase in 2024. Higher rates make borrowing more expensive for households and businesses, which tends to slow spending and ease inflationary pressure. Treasurer Jim Chalmers has warned that next week’s budget will focus on savings and restraint to offset the tightening.

Inflation reached 4.6% year‑on‑year to March, driven by the Middle East war's impact on oil supplies. Disrupted crude flows pushed Brent prices up, raising transport and production costs across the economy. This external shock has added to domestic price pressures even before the latest fiscal data.

Government spending now accounts for its highest share of the economy in 40 years, excluding the pandemic period. Elevated outlays boost aggregate demand, which can counteract the cooling effect of higher interest rates. Economists note this fiscal stance has contributed to inflation trends earlier in the year.

Markets reacted swiftly: the ASX 200 fell 0.8% to 7,350 points, trimming its market cap to roughly A$2.3 trillion. Woodside Energy (WDS.AX) gained 1.2% as oil prices lifted its valuation to about A$45 billion. Commonwealth Bank (CBA.AX) slipped 0.5%, bringing its market cap near A$180 billion, as investors priced in higher funding costs for lenders.

The rate hike works by increasing the cost of credit, which discourages big‑ticket purchases and business expansion. At the same time, strong government spending injects money into the economy, potentially sustaining demand. Oil‑driven cost pushes add a supply‑side element that rates alone cannot fully address.

Investors will watch the RBA’s statement for clues on future tightening and the upcoming budget for any offsetting measures.