MNI STATE OF PLAY: RBA Ponders Inflation Impact Of Govt Budget

The Reserve Bank of Australia board will have its first opportunity this week to discuss the economic impact of last week’s federal budget, which included AUD8.6 billion of spending measures as the Liberal party-led coalition heads to a May election.

Economists, and policymakers, are split on the inflationary implications of the budget. It does comprise cash handouts to voters and includes a halving of the retail fuel tax to cushion motorists from higher petrol prices.

RBA board member and the secretary of the Treasury Steven Kennedy said last week that week he expects CPI inflation will accelerate to 4.25% in the March and June quarters compared to 3.5% in December 2021.

The RBA, however, is more concerned with underlying inflation which excludes energy. Underlying inflation is currently at 2.6% and is in the RBA’s 2% to 3% target range for the first time in seven years.

ELECTION BY MAY 21

Prime Minister Scott Morrison could also call a general election this week with a poll due by May 21, making a policy move by the RBA even more unlikely as it appears set to leave interest rates on hold at the record low of 0.10% on Tuesday, see: MNI STATE OF PLAY: Wages Data Allows Dovish RBA March Review.

The RBA has continued to be dovish while the market expects a rate hike later this year. Governor Philip Lowe has continually downplayed the inflation outlook and is also focused on weak wages growth which the bank says is key to “sustainable” inflation in achieving the RBA target.

AUD IN FOCUS

Another factor in the RBA thinking could be the strength of the AUD, which has moved from USD72 cents at the end of 2021 to USD75 cents this week. Australia is a major exporter of energy and mining commodities, which aids AUD gains

The central bank is understood to prefer a lower rate for the AUD, and a stronger currency could add to its dovish outlook via lower import costs.