MNI INSIGHT: RBA Hike Case Strengthens On Likely Fiscal Boost

--Stimulus May Not Be Reflected In RBA May Policy Statement

by Sophia Rodrigues

     SYDNEY (MNI) - A likely fiscal boost for the economy following Australia's

budget could strengthen the case for the central bank to hike the cash rate by

early next year, as it may help accelerate progress towards growth and inflation

goals.

     However, this doesn't rule out the possibility that the Reserve Bank's

first hike in cash rate could come as early as the end of this year.

     The economy could get a boost from the government's plans to lower the

corporate tax rate and provide tax relief to middle-to-lower income families.

Together, they have the potential to raise both employment and growth momentum

in the economy, helping boost household consumption.

     Tax relief to families would play the same role as a boost in income from

wage growth. The RBA could hope that instead of an acceleration in wage growth

driving inflation, the combined effects of employment growth and faster economic

growth would lead to an acceleration in inflation, and from there to an

acceleration in wage growth.

     --POSITIVE NARRATIVE

     RBA Governor Philip Lowe has, for many months now, been building a positive

narrative around higher interest rates, reminding that a rate hike is good news,

indicating an economy that is doing well.

     "It is worth remembering that the most likely scenario in which interest

rates are increasing is one in which the economy is strengthening and income

growth is also picking up," Lowe said in his most recent speech on April 11.

     And for the first time, the government also appears to be coming on board

the rate hike narrative, and may not be resistant to hike in interest rates. 

--GOVERNMENT MORE CONFIDENT

     Stronger-than-expected tax receipts, strong employment growth, elevated

business conditions and an upgrade in the 2018 growth forecast by the

International Monetary Fund are all developments 

     that have made the government confident to give a fiscal boost to the

economy.

     Tax receipts up until February were running A$4.8 billion higher than the

government estimated in the revised budget outlook in December, including A$1.2

billion in higher individual tax receipts and A$3.0 billion in higher company

tax receipts.

     In a speech earlier Thursday, Treasurer Scott Morrison signalled a cut in

corporate tax cut is likely in the May 8 Budget.

     "We have already delivered a five percentage point reduction in tax rates

to businesses with a turnover under A$50 million, and it remains our mission to

extend those cuts to all businesses, to give them the incentive to invest, hire

more Australians and create a stronger economy," he said.

     Morrison also indicated there will be income tax cuts for middle to lower

income Australians.

     "In closing let me confirm that in this year's Budget we will be delivering

tax relief to put more money back in the pockets of middle to lower income

Australians to deal with their own household and family budget pressures," he

said.

     --NO FORECAST IMPACT

     The budget is due after both the RBA's board meeting, on May 1, and the

Statement on Monetary policy, due on May 4.

     While a lot of the budget details may be known by then, including

Morrison's comments Thursday, the RBA is likely to follow its usual practice of

not incorporating the details in its forecasts until after the announcement is

made.

     This means any upgrade in forecast due to fresh fiscal measures is unlikely

to be reflected in the May policy statement.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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