Think Big: Will the Budget cash splash fast-forward the RBA’s next rate hike?

For investors, last night’s Federal Budget provided confirmation the Morrison government is committed to ongoing fiscal support over the next five years.

And UBS said it brings “the risk of an earlier rate hike” into play as the economy rebounds.

The expectation going in was for a material cash splash across social services and aged care, as well as extensions to tax offsets for middle/low income earners.

That all happened, but the UBS economics team (led by George Tharenou) highlighted some additional “budget surprises” in what they described as a “massive” $96 billion forecast through to 2024/25.
 

Money in, money out

For starters, the government approached this year’s budget from a position of relative strength compared to six months ago.

Iron ore prices are booming, and the jobs market has rebounded much quicker than expected.

So the 2020/21 deficit came in at ~$161 billion — well below the earlier consensus of around $200 billion.

Extrapolated over the next five years, that will flow through to cumulative budget improvements of around $104bn, UBS said.

But looking ahead, Tharenou thought the government would flag another ~40bn of spending over the next five years. Instead, it flagged more than double that.

As a result, the budget improvements will be almost “completely offset by policy decisions (that deteriorate the budget balance)”, UBS said.
 

‘Virtuous cycle’

Austerity is out. And while borders will remain closed through to next year, Tharenou said the government is betting on a “virtuous cycle” of growth stemming from its big spending programs.

More stimulus results in the “economy and labour market booming, underpinning a materially better than expected budget ‘starting point’, then allowing for even more fiscal stimulus”, UBS said.

As the government maintains its spending commitments while growth lifts and the unemployment rate drops, that will put “upward pressure on wages and inflation”. And that’s where the RBA comes into play.

A key factor in the government’s spending plans is the fact that rates are at record lows, which means the cost of servicing that debt is also at record lows.

But as the economy reaps the benefits of fiscal firepower, Tharenou expects the RBA will make some changes to its current forecast.

For starters, he said the RBA “should be more willing” to commence the taper of its asset purchase (QE) program before the US Fed.

On the outlook for interest rates, UBS still expects the RBA to keep rates on hold at rock bottom until the end of 2022.

However, “we now see the risk of an earlier rate hike than the RBA’s forward guidance of 2024”, Tharenou said.

The post Think Big: Will the Budget cash splash fast-forward the RBA’s next rate hike? appeared first on Stockhead.

Barry Stroman was a reporter for Zerg Watch, before becoming the lead editor. Barry has previously worked for Wired, MacWorld, PCWorld, and VentureBeat covering countless stories concerning all things related to tech and science. Barry studied at NYU.

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