Australia’s Budget Boost Risks More Hawkish RBA, Economists Warn

(Bloomberg) -- Australia’s central bank is likely to keep interest rates elevated for longer, economists said, despite Tuesday’s budget forecasting inflation to fall back within the 2-3% target by year’s end, a result that would normally open the door to earlier easing.

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The center-left Labor government’s energy rebates and rent assistance are estimated to reduce inflation by half a percentage point, taking the Consumer Price Index to 2.75% by December, from 3.6% in March. That’s about a year earlier than the Reserve Bank forecast in an update just last week.

The risk, economists say, is the government has overdone cost-of-living assistance: the A$300 ($200) power subsidy goes to rich and poor alike, meaning it could be used for consumption. It also comes on top of tax cuts that begin July 1, potentially further fueling inflation.

Most economists surveyed by Bloomberg on Wednesday reckon the budget has made the RBA’s job harder, not easier.

“The dominant risk continues to be the trajectory for inflation, the demand support from fiscal measures potentially slowing the pace of disinflation and delaying the point at which monetary easing comes into frame,” said Luci Ellis, a senior RBA official until late last year and now at Westpac Banking Corp.

Tuesday’s budget showed the government’s books would shift from being A$9.3 billion in the black in the current fiscal year to A$28.3 billion in the red in fiscal 2025, double the estimate in a Bloomberg survey. The deficit then gapes to A$42.8 billion, or 1.5% of GDP, in fiscal 2026.

Such an expansionary stance will make the RBA wary, said Shane Oliver, chief economist at AMP Capital Markets Ltd. and a veteran budget watcher. “The net effect adds to the risk of higher for longer interest rates.”

The consensus among economists is that monetary easing will begin in November, though many are now hedging that rates could stay at the current 12-year high of 4.35% until 2025. Money markets aren’t fully pricing a rate cut until May next year, by when an election must be held.

While the mechanical drop in the CPI due to the government’s policies is likely to be welcomed by voters, economists note that the RBA focuses heavily on core inflation, which smooths volatility and is likely to remain sticky irrespective of the budget measures.

Prashant Newnaha, senior Asia-Pacific rates strategist at Toronto Dominion Bank in Singapore, warned that the deterioration in the fiscal position means “the RBA hiking in the second-half of this year cannot be ruled out.”

Money market pricing still shows a slight chance of a hike in June or August.

Economists were further disappointed by the budget’s lack of a strategy to boost productivity and bring down unit labor costs. The upshot is any decline in inflation will be “artificial rather than transformational,” said Devika Shivadekar, an economist at consultancy RSM Australia.

“The RBA may be compelled to contemplate interest rate hikes, with the intention of directing the surplus funds toward mortgage repayments rather than discretionary expenditures,” she said.

Treasurer Jim Chalmers, questioned on the largess at the traditional post-budget lunch on Wednesday, said the fiscal blueprint “takes a responsible middle course” and “shouldn’t diminish all the progress we’ve made.”

--With assistance from Garfield Reynolds and Ben Westcott.

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