Will the budget affect the timeline for rate cuts

Will the budget affect the timeline for rate cuts?

By: Nfinity Financials0 comments

The Consumer Price Index (CPI) is predicted to decline to 3.5% by the fiscal year’s end and 2.75% (within the RBA’s target zone) by the end of the fiscal year 2024–2025, according to the budget documents.

The RBA has projected inflation to reach 3.8% by year’s end before falling to the target range in the second half of 2025, while the Treasury has predicted inflation to return to the target band by the end of 2024.

According to Nfinity Financials team, the net new expenditure in the 2024/25 budget aligns with their expectations of incremental fiscal easing of ¼ to ½ of GDP.

We feel “ That is why our near-term growth, inflation, and RBA estimates are unaffected directly”.

More significant for those projections will be how customers react to the Stage 3 tax cuts; for an early indication of this, we’ll be looking for consumer confidence.

Nevertheless, we find nothing in the budget to refute our belief that the upcoming rate-cut cycle would be brief, with Research only seeking three rate cuts overall.

The RBA is “likely to remain cautious,” according to the economics team of the Commonwealth Bank of Australia (CBA), with headline inflation expected to be 2.75 percent in 2024–2025.

Because of the expansionary fiscal framework and the strong level of economic investment, there is now a greater chance that the first interest rate decrease may be postponed and that the neutral cash rate may be higher than we presently anticipate.

The budgetary decisions made this year constitute “on balance a loosening in policy”, but will only slightly increase the central bank’s challenge in getting inflation back to the goal range of 2-3%.

The Nfinity team took notice of the budget’s inflation projections, which showed a “more rapid improvement” in the near run compared to the major bank’s and the Reserve Bank of Australia’s (RBA 3.2% and NAB 3%) mid-2025 expectations for inflation.

There will be a large impact on measured inflation of energy and rent subsidies, RBA can sense this by setting the monetary policy.

However, rates will remain on hold until late this year and the budgetary deterioration is not significant enough to alter our assessment at this time.

We believe that the key risk remains the “inflationary trajectory,” with fiscal stimulus potentially lowering the rate of disinflation and postponing the time at which monetary easing becomes necessary.

Synopsis

The Australian government’s 2024/25 budget has aroused debate among economists about the implications of inflation and interest rates. Here’s the breakdown:

Inflation Forecast

  • The government’s budget forecasts that inflation would decline to 2.75% by the end of the fiscal year, within the RBA’s target range.
  • With a more cautious outlook, the RBA projects inflation to reach 3.8% before closing in on the target range in late 2025.

Impact on Interest Rates

  • Researchers Nfinity maintains their prediction of three rate cuts and thinks the budget will have little effect.
  • Some (CBA) believe that the budget’s expansionary provisions will cause the first rate drop to be delayed.
  • In general, policy is perceived to have been slightly loosened by the budget, which may make it more difficult for the RBA to control inflation.

Key Concerns

  • The budget is generally seen as having somewhat eased policy, which might make it more challenging for the RBA to control inflation.
  • Some claim that the expenditure in the budget may delay rate decreases and slow down disinflation.

The analysis emphasises how unknown it is how the budget will affect interest rates and inflation. There is disagreement among economists; while some anticipate no shift, others see possible postponements of rate reductions. What matters most will be how inflation acts in the upcoming months.

For more detailed insights and guidance on the complexities of the Australian housing market, contact Nfinity Financials. You can Read our article and also Book a consultation call at 1300 GET LOAN.

Related post

Leave A Comment