Handouts would have fuelled inflation: RBA

Cash handouts to ease cost of living pressures in the October budget would have made inflation worse, a senior Reserve Bank of Australia official has confirmed.

RBA deputy governor Michele Bullock said spending the substantial revenue upgrades from high commodity prices on direct cost of living support would have made its job of taming inflation harder.

"What we're trying to do is reduce demand a bit so that it comes back more into line with supply," she told a parliamentary committee on Thursday.

"And if the government, on the other hand, is giving out lots and lots of money, then that's going to be a harder task for monetary policy."

But she said Labor's first budget was "certainly not contractionary" but "certainly moving in the right direction".

"It's appropriate that the budget starts to try and consolidate," she said.

When asked by Labor senator Deborah O'Neil if the October budget was better aligned with monetary policy than the coalition's budget in March, Ms Bullock said the central bank did not consider individual policy decisions but rather considered the budget balance in aggregate.

"What we're looking at usually is what does the overall budget balance and the overall fiscal stance imply for whether it's expansionary for demand or contractionary for demand," she said.

Ms Bullock also fielded questions about controversial forward guidance provided during the COVID-19 pandemic that implied, with various caveats attached, that interest rates were unlikely to rise by 2024.

"We were caught by surprise," she explained.

"Other countries were caught by surprise by the strength of inflation, and under the circumstances, we had no choice but to start raising interest rates."

Greens senator Nick McKim said people were induced into buying property on the understanding interest rates would not go up for a few more years.

Ms Bullock said accountability for the statements came down to the board that was doing its best in an "uncertain environment".

Nobody at the central bank has resigned as a consequence of the controversial forward guidance.

Ms Bullock also defended the bank's undershot inflation forecasts - namely the war in Ukraine driving supply shocks and pandemic-era supply chain issues taking longer to resolve than expected - and the role of its massive bond purchasing program on inflation.

"About the bond purchase program and the low interest rate and the expansion is that, at the time, we were deliberately trying to inflate the economy, the economy was absolutely in the doldrums," she said.

"We were taking out insurance against a really really bad outcome," she added.