RBA Governor Bullock: Larger Budget Deficits Increase Interest Rates

Reserve Bank of Australia Governor Michele Bullock acknowledged that larger Budget deficits contribute to higher interest rates, linking increased government spending to the RBA’s neutral cash rate. During a Senate estimates hearing, she stated that reduced savings in the economy, combined with steady investment, exert upward pressure on the neutral rate. Current forecasts suggest the cash rate will remain at 3.6% until 2026, as the Budget deficit for the first four months of 2025-26 reached $32.9 billion, significantly higher than the previous year’s total. Bullock indicated that a smaller deficit could potentially lead to lower interest rates, though global factors must also be considered.

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