Treasurer plays down inflation disparities

The Federal Treasurer has refuted suggestions that there are significant differences between Treasury and the Reserve Bank on inflation and household debt forecasts. Mr Costello claimed that Budget forecasts were “pretty much the same” as the RBA's. But market economists say there are considerable disparities between Treasury and the RBA on inflation, with Treasury taking a more optimistic view. HSBC's John Edwards said that the differences suggest that Treasury is more likely to oppose interest rate increases in the monetary policy tightening cycle.

In the Budget papers, Treasury forecast that consumer prices would grow by 2.5 per cent in the year to June 2003, and that moderate wage growth, productivity increase and subdued import prices would keep inflation constrained in the short term. In contrast, the RBA said last week that inflation is expected to rise to the top of the target band over 2003, as continued rapid growth in demand and activity would see the economy's capacity constraints putting upward pressure on wages and prices.

The Treasury and the RBA do agree that the expansion in household debt has left the sector more exposed to rises in interest rates. The RBA expressed more concern, however, saying that households could become overstretched, while Treasury played down the risks.

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