Next interest rate move is likely to be up

The takeout quote from RBA governor Michelle Bullock's press conference on Tuesday was: "I hope we don't have to increase rates again but if we have to we will".

While she expressed sympathy with those doing it tough, Ms Bullock said a rate rise was discussed and that if necessary the RBA would continue to be cruel to be kind.

That also appears to be implicit in the RBA board's statement that "while inflation is easing, it is doing so more slowly than previously expected and it remains high".

According to the board: "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out".

It is clear that last November's decision to increase the cash rate, widely criticised as unnecessarily pre-emptive, was justified. If it had not occurred the outlook, which is weighed down by sticky service sector inflation, geopolitical instability with full-scale wars being waged in Gaza and Ukraine and a recent spike in oil prices, would almost certainly have been worse than it is.

On the plus side unemployment, remarkably, still has a three in front of it and the exchange settlement rate of 4.25 per cent is significantly lower than in the US, New Zealand and other countries which elevated rates faster and higher than Australia.

Unfortunately, both figures are part of the problem. Because our interest rate is quite a bit lower than in the US the Australian dollar is weak against many of our trading partners.

That has an inflationary effect. The manufactured products Australia imports, which include white goods, motor vehicles and even many of the basic nuts and bolts needed for home construction, cost consumers more as a result.

While there is an argument that because Australians generally take out variable mortgages (as opposed to Americans who usually borrow at a fixed rate) local rates did not have to rise as much to cool demand in the economy, that doesn't appear to have been the case.

Near record low unemployment, which has grown the government's tax take and made Dr Chalmers's job of delivering a second budget surplus much easier, is also inflationary due to the pressure it places on wages. Over the past year wages and salaries have grown at a rate not seen for at least a decade sparking fears of a 1970s style wage price spiral.

Ms Bullock is on the record as saying before her appointment as the RBA governor that ideally unemployment should have a four in front of it if inflation was to come down to a desired level with a reasonable degree of alacrity.

So where does this leave the budget the Treasurer is due to hand down in just seven days time? It is possible Dr Chalmers will seize on the RBA's statement as justification for rejecting the push to increase JobSeeker to 90 per cent of the pension.

He will also argue that the remodelled stage three tax cuts constitute much needed cost-of-living relief. But that is only true for people who are actually paying tax.

More needs to be done for those at the bottom of the income pyramid; especially those dependent on welfare payments which have not kept pace with wages.

Giving the poorest in our community a few more dollars to spend is highly unlikely to be inflationary. It would be spent on essentials such as shelter, food and power; not on unnecessary luxuries.

The battlers deserve to have a break.