While Bullock used her press conference to argue it was “not every helpful” to argue there may be inflation pressures out of recent federal and stage budget spending,the board statement after its meeting noted that they may have an impact on overall economic demand.

“Recent budget outcomes may also have an impact on demand,although federal and state energy rebates will temporarily reduce headline inflation,” it said.

Chalmers,speaking on ABC radio this morning,said he did not tell the governor or RBA board how to do its job and they did not tell him how to set fiscal policy.

“The governor said that they didn’t discuss budgets specifically,she said that they didn’t think it was helpful to focus on it because over-focusing on budgets doesn’t take into consideration all of the other things that are happening in the economy,” he said.

“That speaks to a really important point,which is that budgets aren’t the primary determinant of interest rate movements in our economy.

“Budgets aren’t the sole and certainly aren’t the primary determinant of future movements in interest rates.”

While an interest rate increase was discussed at the board meeting,Bullock said the case for a rate rise was not increasing. If private construction and investment turns out weaker than expected,that would flow through to higher unemployment which would then put interest rate cuts on the RBA’s agenda.

Another uncertainty is the $23 billion stage 3 tax cuts that start from July 1. Bullock said people could save this cash or put it into their mortgage offset accounts while some would likely use the cash to buy essential goods and services.

Shadow treasurer Angus Taylor said the high degree of uncertainty facing the Reserve Bank had been caused by the government and its budget settings.

“The only thing that is certain is that this government’s budget absolutely failed to deal with those inflationary interest rate pressures that Australians are facing,” he said.

Betashare Capital chief economist David Bassanese said much now hinged on the July 31 consumer price index report,putting the chance of an interest rate increase in August at 40 per cent.

He said if both the headline and underlying measures of inflation were 0.8 per cent for the June quarter,the Reserve Bank would be relatively comfortable with interest rate settings.

“Any further upside surprises to inflation,however,whatever their cause – would be hard for the RBA to ignore,” he said.

The Commonwealth Bank’s head of Australian economics,Gareth Aird,said an inflation result of 1 per cent or more would challenge the Reserve Bank into taking action,noting it was still more likely the next rate move was a cut.

“We retain our base case that the next move in the cash rate is down. And we have November pencilled in for the first rate cut. But given the challenging underlying inflation backdrop,as well as a labour market that is loosening more gradually than expected,the runway is shortening between now and November,” he said.

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