Australia’s most powerful banker has given a strong hint that excessive government spending is to blame for high inflation, ruling out rate cuts until 2025.

Reserve Bank of Australia Governor Michele Bullock’s latest warning was delivered ahead of her American counterparts cutting rates for the second time this year.

On Friday morning, the US Federal Reserve delivered its second rate cut in 2024 with the latest 25 basis point reduction, taking its key interest rate from 4.75 to 4.5 percent.

While it’s still marginally higher than Australia’s 12-year high level of 4.35 per cent, it’s another sign Australia is missing out as the rest of the world cuts interest rates.

This week, Ms Bullock revealed that she had personally told Treasurer Jim Chalmers that too much government spending was causing Australia’s inflationary problems.

‘My reading, when I speak privately to the Treasurer, and when I hear him speak on television and radio, is that he’s fully aware of the inflationary implications, of his own policies, he needs to be thinking about that, because he – like me – understands that inflation is really what’s hurting people at the moment,’ she told reporters on Tuesday.

The RBA chief also told the Senate economics committee on Thursday she hoped Dr Chalmers understood that inflation would not ‘sustainably’ fall within the Reserve Bank’s 2 to 3 per cent target until the end of 2026.

‘If he’s read our statement on monetary policy, he would be aware of it,’ she said.

While headline inflation has fallen to a three-and-a-half year low of 2.8 per cent, the number is based on one-off $300 electricity rebates and falling petrol prices.

The RBA also released new forecasts this week having inflation soaring back to 3.7 per cent by the end of 2025, after those quarterly energy rebates expired. 

While headline inflation is low now, underlying inflation – with volatile price items removed – was higher at 3.5 per cent in the year to September.

The Reserve Bank isn’t expecting this core measure of inflation – also known as the trimmed mean – to ‘sustainably’ drop to 2.5 per cent until December 2026.

‘The key word there is ‘sustainably’,’ Ms Bullock told senators. 

She also explained that while the RBA’s 2 to 3 per cent target was based on headline inflation – also known as the consumer price index – a sustained drop in price pressures was based on underlying inflation dropping too.

‘We’re focusing on headline but we’re using underlying to give us an indication of where headline is heading,’ she said.

By contrast, American headline inflation in the year to September was much lower at 2.4 per cent.

But the U.S. level of underlying inflation was higher at 3.3 per cent. 

Unlike Australia, the American economy  is still growing at a strong pace and inflation is more contained.

This gave the US Fed the impetus to cut rates again for the second time in 2024. 

‘Recent indicators suggest that economic activity has continued to expand at a solid pace,’ it said in a statement.

By contrast, Ms Bullock hinted another rate rise was still possible.

‘So there’s just some things at the edges that suggest that there might be a little bit of upside risk in here. That’s why I say we can’t rule anything in or out,’ she said.

Australia no longer has the lowest interest rates among rich-world nations with the Bank of Canada having a 3.75 per cent policy rate that is 60 basis points lower than Australia’s – following four cuts this year.

The European Central Bank has cut rates three times in 2024, the Reserve Bank of New Zealand has cut rates twice, while the Bank of England has done one cut.

Ms Bullock blamed federal and state governments for big spending that is adding to inflation.

‘I should emphasise here it’s not just the federal governments, it’s the state governments as well,’ she said.

‘So, in the fact that we’ve had to revise up our public demand forecasts it’s reflected the fact that there’s been more announcements and more things going on.’

Should Labor be re-elected next year, Prime Minister Anthony Albanese is expected to preside over $1trillion in gross debt by 2025-26, making up 35 per cent of gross domestic product. 

Australia’s Big Four banks – Commonwealth, Westpac, ANZ and NAB – are expecting the first rate cuts in February.

But the 30-day interbank futures market doesn’t see relief occurring until June and now only has two cuts priced in for 2025 as the rest of the world continues to ease monetary policy.