Treasurer Jim Chalmers has received a blunt warning from Reserve Bank of Australia governor Michele Bullock about the inflationary consequences of any potential splashy pre-election spending promises as she left the door open to even higher interest rates.
The governor's message comes as Prime Minister Anthony Albanese prepares to tell business leaders it is almost mission accomplished after two years of economic pain, and that the worst of inflation is behind the country.
Ms Bullock cautioned that "significant" ongoing inflation meant "we can't rule anything in or out" on interest rates.
"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," she said on Tuesday.
"He needs to be thinking about that. Because he — like me — understands that inflation is really what's hurting people at the moment."
Michele Bullock did not rule out the need for further interest rate increases. (AAP: Bianca De Marchi)
The governor's remark intensifies pressure on both sides of politics to keep a lid on pre-election spending promises that could keep the economy running too hot for inflation to come back to the centre of the Reserve Bank's 2-3 per cent target range.
That is something Ms Bullock said the central bank does not expect to happen in a "sustainable" way until 2026, a sign interest rate cuts may not be possible until well into next year at the earliest.
"There are just some things at the edges that suggest that there might be a bit of upside risk in here," she told reporters at a press conference after the RBA's interest rate meeting.
Upside risk refers to the possibility that the central bank is underestimating inflation and economic growth.
Mr Chalmers said in the wake of Labor's Queensland election loss, the coming federal election "was never going to be — from our side — a free-for-all of public spending".
While slowing headline consumer price index growth meant the Reserve Bank decided to keep the cash rate steady at 4.35 per cent on Tuesday, Ms Bullock said there was "still a significant amount of inflation in the system", as well as a labour market that looked "on the tight-ish side".
The governor's remarks are a blow to hopes within the federal government that next year would bring interest rate relief for voters across marginal suburban electorates around the country.
'The worst is behind us': Albanese
By contrast, in a speech he is due to give to one of the nation's biggest employer groups this evening, Mr Albanese is striking an optimistic note after years of economic pain from the pandemic and global conflicts.
"In the face of this global uncertainty, the businesses and workers represented here tonight have shown extraordinary resilience," Mr Albanese will tell the Australian Chamber of Commerce and Industry annual dinner in Canberra.
Anthony Albanese is set to give a speech at the Australian Chamber of Commerce and Industry's annual dinner. (AAP: Lukas Coch)
"And when we look at our economy today, we can be optimistic that the rewards of that resilience are now in sight."
"There is new cause to hope that the worst is behind us."
Among the positive signs, Mr Albanese cited headline inflation with a "two in front of it, and it's falling", as well as a turnaround in consumer confidence, and rising business investment and wages.
"It's a record of performance from which we can draw confidence in facing what's ahead," he will say.
"Together, we have navigated a global storm. And even in rough seas, we've kept an eye on the horizon."
Opposition criticises spending promises after RBA's upward revisions
Mr Albanese this week promised $16 billion in student debt relief in the first of what are expected to be a series of announcements aimed at winning over households and younger workers struggling with housing affordability and other costs.
The opposition has seized on the promise, which will only be delivered if Labor is re-elected, as more "reckless spending" that has kept inflation too high to enable the Reserve Bank to cut interest rates.
"They have not solved the underlying problem here … and of course core inflation is not expected to get back to the target for two years," Shadow Treasury Spokesman Angus Taylor said.
"[There is] so much more pain to go in terms of price increases."
The Reserve Bank also revealed on Tuesday that it did not predict the scale of increased federal and state spending.
Additional spending announcements prompted the central bank to revise up its public consumption forecasts "several times over the past year", with a large share coming from cost-of-living packages.