RBA to face questions on government's contribution to inflation fight

Dr Lowe is expected to be grilled on the outlook for interest rates following the release of data showing the unemployment rate spiked to 3.7 per cent in January when he appears before the Standing Committee on Economics, with ANZ forecasting rates to rise to 4.1 per cent and stay there until November next year.

But the committee's deputy chair, Coalition MP Garth Hamilton, said he would be pushing the governor on what more the government needs to do help the Reserve Bank reduce price pressures in the economy.

Mr Hamilton said the the outlook of the RBA governor on the state of the economy had darkened considerably since his last appearance in September, and the MP said he put that down to "Labor's inaction on fiscal policy".

The Member for Groom said it was clear domestic pressures were becoming increasingly significant in driving inflation, particularly government spending.

In his testimony to the Senate Economics Legislation Committee on Wednesday, Dr Lowe said the current impact of fiscal policy on the economy was "neutral" and credited the federal government with banking its revenue windfall at the October budget.

Treasurer Jim Chalmers has said the government is pursuing a three-pronged strategy of targeted cost-of-living relief, strengthening supply chains and spending restraint.

But Mr Hamilton said in the current high inflation environment that was not good enough.

"I don't think restraint cuts it. I think the Treasurer has to commit to reducing spending," he said.

"I am not going to pretend these are easy-fix problems but fiscal policy is working against what the RBA is doing. There is no cohesive plan to work with the RBA."

In a major update on the economic outlook, prominent thinktank the Committee for Economic Development of Australia (CEDA) said although the country should avoid a recession the Albanese government needed to avoid spending that added to inflation.

"The Treasurer will need to continue the prudent path laid out in his first budget. Fiscal policy will need to be well-calibrated with monetary policy to avoid adding to inflation," CEDA chief economist Jarrod Ball said.

"This will be particularly difficult at a time when there are justified calls for more support in areas such as Medicare, Commonwealth rental assistance and income support."

But Dr Chalmers said the RBA governor himself had said the budget's position was "broadly neutral. It's not adding to, in his estimation, the inflation pressures in our economy".

The Treasurer added spending the government was committing to had an economic dividend.

"Not every dollar that you spend in the budget is inflationary. A lot of the investments that we have been making in early childhood education or fixing supply chains or in all kinds of other ways, are about expanding the capacity of the economy so it can grow faster without adding to this inflation," he said.

"The magnitude of the spending matters, but so does the nature of the spending."

Friday's Economics Committee hearing comes amid continuing speculation about the future of the RBA governor, whose seven-year term expires in September.

At a Senate committee hearing on Wednesday, Dr Lowe was emphatic he would serve out the full period of his appointment. Dr Chalmers on Thursday refused to buy in to speculation about the governor's future.

"I have a good respectful relationship with governor Lowe and he has a hard job to do, which is to try and get on top of this inflation challenge without crashing the economy," he said.

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The government is due to receive the result of review it has commissioned into the Reserve Bank on March 31.

"The decision that the government takes on governor Lowe's reappointment or otherwise will be made closer to the middle of the year and the reason for that is that I want to see what the Reserve Bank review says about the structure and processes and objectives of the Reserve Bank," the Treasurer said.

"I want to make sure that whoever we appoint governor has the ability to put in place the directions that we agree after having received the report."