Economists say the federal budget is unlikely to have more than a marginal effect on the Reserve Bank of Australia’s interest rate stance, but several risks remain including the inflationary effects of a population boom on rents and how energy and commodity prices play out.
The Albanese government’s second budget, released last night, predicted inflation would slow from 7% in the March quarter to 6% for the April-June period and almost half that – to 3.25% – by June next year. That slowdown compared with the RBA’s 3.5% prediction for the June quarter of 2024 published last Friday.
The treasurer, Jim Chalmers, has downplayed any inflationary pressure coming from a budget that produced the first projected surplus – at $4.2bn for the current fiscal year – since 2007-08. The budget, though, falls back into deficit from next year, with $12bn in extra spending earmarked for the 2023-24 year.
“We are supremely confident that the budget that we handed down last night will take some of these cost-of-living pressures off without adding to inflation,” Chalmers told the national press club.
“The fact that the cost of living package only adds 0.1% of GDP in that period, the fact that our energy plan, the combination of the price caps and the bill relief takes three-quarters of a [percentage point] off inflation next year, all of these things, I think, are important demonstrations for why so many of the bank economists in particular have come out today and said at worst the impact on the economy is neutral and many of them have said better than that,” he said.
Did the budget increase the chances of another RBA interest rate rise? Investors assessed the odds of a rate rise as a 0% chance at the June RBA board meeting before the budget landed...and afterwards? Still 0% chance, with a cut pencilled for next March. pic.twitter.com/BLKloKs4Wa
— @phannam@mastodon.green (@p_hannam) May 10, 2023
Economists contacted by Guardian Australia said the budget was unlikely to budge the RBA’s view of the timing or size of any further interest rate rises. Should the forecasts for inflation to ease off prove too optimistic, however, the central bank may leave its cash rate higher for longer.
“We consider the budget to be relatively neutral on inflation,” Adelaide Timbrell, a senior ANZ economist said, adding the bank still expected the RBA to hike the cash rate one more time by 25 basis points to 4.1% at its August meeting. The next change after that would be a cut but not until the December quarter of 2024.
Alan Oster, NAB’s chief economist, said “we don’t think [the budget] will change the RBA’s thinking at all”.
“It really depends on the data and whether the RBA thinks inflation returning to [the 2%-3%] target by mid-25 is quick enough,” Oster said. “We are thinking about that at present.”
Bill Evans, Westpac’s senior economist, said: “I don’t think there’s anything in this budget that will make them go, ‘we have to raise rates’.”
Evans said the risks of an extra $12bn in spending would depend in part how consumers respond to measures such as the $3bn in federal and state support for energy bills.
“Obviously if you lower someone’s energy costs, that produces more money for them to spend elsewhere, which can boost demand and can put inflation pressures elsewhere,” Evans said, adding “we don’t know the answer” how those forces would play out.
Warren Hogan, the chief economist at Judo bank and among those to correctly predict the RBA’s rate rise last week, said the extra spending had to be weighed against the end of some other programs such as the low- and middle-income tax earner offset worth as much as $11bn a year.
Hogan has retained his forecast that the RBA has at least one and possibly more rate rises to come. The key risks included the effect of the population expanding 2% in 2022-23 and 1.7% next years.
The rapid population increase – up from the 1.4% pace projected in last October’s budget for this year and next – was “an historically unusual event” since it was also occurring at the time of an overheated economy, Hogan said.
While more numbers may ease wage increases, they would also push up rent increases and that component was already the largest single category in the consumer prices index, he said.
That pressure and what it might mean for the pace of the expected inflation slowdown “is completely my focus”, Hogan said.
Other issues to watch would be the upcoming Fair Work Commission outcomes for wage increases and whether energy bills do increase at the much slower levels predicted in the budget. The budget forecast retail power prices would rise another 10% this coming fiscal year and gas by 4%, thanks largely to a government price cap on gas.
David Bassanese, the chief economist at BetaShares, was one economist arguing the budget would make another rate rise more likely.
“[T]he second Labor budget under Treasurer Jim Chalmers is unambiguously expansionary, with a boost to GDP growth equivalent to around 1.5% over the next two years,” Bassanese said. “This adds to the risk that the RBA will feel the need to raise interest rates at least once and possibly twice more in the coming months.”
