Stimulus spending is prompting rate hikes, says RBA member

The federal government's spending on stimulus measures and the $35.9 billion Federal Broadband Network is putting pressure on the Reserve Bank to raise interest rates, a board member at the central bank has said.

Donald McGauchie, the former Telstra chairman, was openly critical of the government's fiscal policies, claiming they were undermining the RBA's efforts to curb inflation and were pushing up rates as a result.

"We are subsidising industries we shouldn't be subsidising, we are spending money on fiscal stimulus and other things we shouldn't be spending money on and that means higher interest rates than we would otherwise have," he told The Australian.

Mr McGauchie also suggested that interest rates could be set to rise further as "we're now back into a very substantial terms of trade shock" – a trend that will increase inflationary pressures.

The comments come after economists from HSBC, ANZ and Westpac all told the Herald Sun last month that they expected an official interest rate rise during the period from April to June 2011, with more rises likely to follow.

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