The Reserve Bank of Australia may have to raise the cash rate earlier than planned due to the size of the fiscal stimulus announced in the Federal Budget last night, according to global Bank UBS.
"Overall, the Budget will further underpin consumer and business confidence – already around record highs – and poses upside risk to our above-consensus GDP outlook of 5.0% in 2021 and 3.3% in 2022,” said UBS Australia chief economist, George Tharenou.
According to Tharenou, the persistence of fiscal stimulus continuing for several years despite the economy nearing the non-accelerating inflation rate of unemployment, will put upward pressure on wages and inflation.
"So even with softer US payrolls delaying Fed tapering, the budget means the RBA should be more willing to taper ahead of the Fed, and hence we still expect the RBA will likely announce a taper in July, with QE3 'up to $100bn', and slower purchases until stopping around year end; as well as not extending yield curve control beyond Apr-24," he said. "We still expect the RBA to hold the cash rate until end-22, but we now see the risk of an earlier rate hike than the RBA's forward guidance of 2024.”
Tharenou pointed to “a virtuous cycle of rounds of much larger than expected fiscal stimulus, resulting in the economy and labour market booming, underpinning a materially better than expected budget starting point, then allowing for even more fiscal stimulus.”
Last week, the RBA upgraded its forecasts in anticipation that economic growth would hit 4.75 per cent over 2021, up 3.5 per cent from its February forecast. The RBA expects the unemployment rate to fall to 5% by the end of the year and hit 4.5% in 2022. During its last cash rate announcement RBA governor Philip Lowe said that while the central bank was increasingly confident about the economic outlook and would likely end its term funding facility to banks, it was still “unlikely” to raise the 0.1% cash rate before 2024.
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