If you read or listen to much of the post-budget commentary you will be led to believe treasurer Jim Chalmers has just fanned the flames of inflation, making another interest rate hike more likely.
“Stimulatory budget could trigger another RBA rate rise,” ran the headline of one prominent article in the Australian Financial Review on Thursday. “Rates reality bites Jim’s spin,” was the front-page headline in the Australian.
Those and other articles tapped economists at UBS, Goldman Sachs and BetterShares who viewed the federal budget as stimulatory and hence, inflationary. They could have asked Westpac, National Australia Bank, ANZ and Commonwealth Bank* – the four biggest banks with the bulk of Australia’s mortgages – and found a view of “no noticeable difference”.
Chalmers, in his usual amiable manner, sought to downplay inflationary fears at his National Press Club address on Wednesday.
“There won’t be unanimity about [the budget’s inflationary impact],” he said. “If you look hard enough you can always find a view at either end of the spectrum. But we’re really confident that we’ve got the balance right.”
Of course, Chalmers would say that, and journalists are right to challenge him. But they are less entitled to ignore abundant market evidence suggesting investors don’t believe Australia’s inflation predicament was made worse by the budget.
Here’s how Westpac summed up the initial response of those fickle financial fingers hovering over keyboards to trade the Australian dollar, bonds, or anything else whose value was perceived to have shifted because of the budget.
“Australia’s budget was received calmly, with key parameters well flagged in advance,” their trading team reported on Wednesday morning.
Markets update: Still no hint that Tuesday's budget increased the odds of the Reserve Bank lifting the cash rate again at its June meeting: pic.twitter.com/WdXct2L5O9
— @phannam@mastodon.green (@p_hannam) May 11, 2023
OK, so the budget always holds some nasties in the fine print that take time to surface. Perhaps it’s not really a surplus because of changes to how the earnings of Australia’s Future Fund are added in, as the AFR reported. Or perhaps next year’s budget might not actually turn out to be a $13.9bn deficit but a second consecutive surplus if commodity prices surprise again, as we flagged on Tuesday evening.
Back to the markets. How did Westpac’s team report on the reaction the day after the budget?
“Australia’s domestic focus was discussion of the federal budget, including what it might mean for interest rates, but without any particular market impact short term,” they said in their Thursday briefing. “RBA pricing was virtually flat on the day and the Australian dollar traded very quietly for much of the day.”
Ah, but what about the longer term? Answer: who knows.
Perhaps China’s economy won’t evade its real estate trap or the US won’t lift its debt ceiling – both potentially very bad for the global economy. At home, we’ll soon get wages data for the March quarter, which could make traders twitchy about salaries rising too fast or not fast enough.
In other words, markets gyrate on the news. And so far, the budget barely registered.
And if you look closely, the timing of the first rate cut has edged slightly NEARER, towards about February next year, from March. Investors make mistakes, of course, but what they are NOT betting on is the budget adding inflationary risks that the RBA has to deal with. pic.twitter.com/Uw7P5g1p9P
— @phannam@mastodon.green (@p_hannam) May 11, 2023
What about the RBA itself? Of course, they will keep monitoring every important data point. Treasury secretary Steven Kennedy is also a board member of the central bank, so his counterparts would be well briefed about the budget.
Or as Chalmers said on Thursday:
“I do speak to the governor [Philip Lowe] about my policies, about my budgets, and the fiscal stance of the government. I do that in advance of releasing the budget and I do it after releasing the budget.”
So why doesn’t the Canberra press gallery pay more heed to how investors act, with billions of dollars at stake, rather than politicians or even economists seeking some commentary differential?
Could it be that few are au fait with financial markets? Perhaps they haven’t sat inside an RBA lock-up and seen how newswires Bloomberg and Reuters jockey for electronic advantage to publish within a blink of an embargo lifting? Time really is money.
Perhaps Chalmers’ best response to questions about the budget’s inflationary impact is to point to the market scoreboard.
Markets don’t always get it right – such as this month’s RBA rate rise surprise – but their verdict is clear for anyone bothering to look.
* The CBA’s view: “The impact on inflation from the budget measures is … mixed,” it said in its commentary. “On balance, we have left our inflation forecasts unchanged.”
