VIEW: NAB Doesn’t Believe Budget Changes Inflation/Rate Outlook

NAB sees the federal government budget’s aims of boosting growth while alleviating cost-of-living pressures as interventionist. With an election due within the next 12 months, it believes there’s a risk of larger deficits from additional election spending. NAB thinks the extra stimulus only “marginally” adds to the “RBA’s difficulty in returning inflation to target” and that it doesn’t have a “material impact” on NAB’s forecasts.

• “Notably, the Budget forecasts a more rapid improvement in inflation in the near term than we or the RBA have been expecting, seeing headline inflation of 2.75% by mid-2025 (NAB 3.0%, RBA 3.2%). This largely reflects the impact of energy and rent subsidies on measured inflation – an effect which the RBA is certain to look through when setting monetary policy. Nonetheless, at this stage we don’t see the fiscal deterioration as being sufficient to change our rate view, still seeing rates on hold until late this year.”
• “The structural deficit widens by around 1 percentage point over 3 years to 2025-26, with the net impulse (after accounting for the tail end of unwinding COVID measures) a net expansionary or loosening impact in 2024-25. Moreover, this impulse is somewhat more expansionary than was previously expected at the 2023 Budget a year ago.”
• “The Budget makes minimal changes to the path of Australian Government Securities on issue or the broader path of debt over the forward estimates. Slightly lower AGS volumes this year (relative to MYEFO) evolve into slightly higher AGS on issue in 2027 – but the net variation by the end of that period is just +$8bn.”
• “AGS issue is expected to end 2023-24 at $904bn; by 2027-28 outstandings are expected to push through $1.1trn face value. AGS to GDP growth, however, does flatline in 2027-28 at 33.9%. In 2023-24, it’s just shy of 32%.”