The information on this website is general in nature and does not take into account your objectives, financial situation, or needs. Consider seeking personal advice from a licensed adviser before acting on any information.
Concerns are mounting among financial experts that the latest federal budget could prompt a rise in interest rates, adding to the challenges faced by borrowers.
Economists have critiqued the 2024 budget for its "stimulative" nature, igniting fears it may counteract the Reserve Bank of Australia's (RBA) efforts to control inflation. This unexpected budgetary shift has led to speculation of potential interest rate hikes rather than impending cuts, which had been anticipated earlier this year.
David Bassanese, Betashares' chief economist, highlighted the increased fiscal spending as a surprising move, given the current economic climate. "The substantial fiscal expansion seen in the budget, particularly in cost-of-living support, appears to have encouraged higher spending in other areas, possibly underestimating the RBA's tolerance for such policies," he observed.
From a balance sheet perspective, the deficit is projected to jump from $9 billion to a staggering $28 billion in the 2024-25 period. This shift, equaling about 1.3% of GDP, signifies a pronounced swing towards fiscal stimulus, raising concerns about further inflationary pressures.
Furthermore, household disposable income is predicted to rise by 3.5% in the next fiscal year, boosted by tax reductions and an energy rebate of $300. Yet, this does not align with the forecasted 2% increase in consumer spending. Mr. Bassanese warned that if households decide to spend rather than save this windfall, the odds of increased interest rates could climb significantly.
Current estimates now put the probability of a rate hike before the next federal election at 40%, a substantial increase from the previous 10%. The unpredictability of how Australians will utilize their enhanced disposable income keeps both economists and policymakers on edge.
According to Stephen Halmarick, Commonwealth Bank's chief economist, the renewed fiscal approach renders earlier expectations of rate cuts - foreseen to begin as early as November - tenuous. The bank's internal estimates had initially projected a drop to 3% by the end of 2025, but these seem increasingly optimistic.
Budget papers reveal an anticipated modest cash rate reduction of 0.75% by 2026, decreasing from the current rates still north of 4%. This gradual easing may now be viewed in a new light, with inflationary pressures potentially suppressing any significant rate cuts over the short term.
Attention has also been drawn to various initiatives within the budget, especially a $23 billion fund for sectors including green hydrogen and critical minerals, aimed at energizing the domestic economy. However, critics argue that in an employment landscape marked by shortages, such expansive policies could further aggravate inflation.
Carlos Cacho, chief economist at Jarden, estimates the budget will inject an additional $30 billion in fiscal stimulus, risking an upward spiral in inflation. KPMG's Brendan Rynne shares this view, describing the budget as creating "upward pressure on inflation," supported by policies that may only temporarily mask the true economic impact until post-election.
The Australian Chamber of Commerce and Industry's Andrew McKellar echoed these sentiments, asserting that enlarging government size and expenditure could lead to increased costs and taxes, thus complicating the economic landscape for businesses.
Despite the prevailing concern, Shane Oliver, chief economist at AMP, indicated that while the risk of prolonged higher rates remains, there is still a probability of rate reductions starting November. Westpac's economists, on the other hand, argue the budget's specifics should not fundamentally alter the RBA's timeline for potential rate cuts.
The intricate balance between fiscal policies and market reactions makes it crucial for stakeholders to stay informed and prepared for various economic scenarios that lie ahead.
Published:Monday, 20th May 2024 Source: Paige Estritori
Please Note: If this information affects you, seek advice from a licensed professional.
As the Australian winter sets in, many individuals are seeking warmer climates overseas. However, a growing number are financing these trips through personal loans, a trend that has sparked discussions about its financial prudence. - read more
Australia's financial landscape is witnessing a significant shift with the expansion of the private credit market, now valued at approximately $200 billion as of the end of 2024. This growth reflects a global trend where non-bank institutions are increasingly providing direct loans to businesses, offering alternatives to traditional banking channels. - read more
Rate Money, an Australian non-bank lender specializing in loans for self-employed individuals, has achieved a significant milestone by surpassing $10 billion in loans. Founded in 2019, the company has rapidly expanded its footprint in the financial services sector. - read more
Embarking on a journey towards financial stability begins with the mastery of personal budgeting. It's the cornerstone of sound money management, where every dollar is allocated purposefully, paving the way for a future free from the shackles of financial stress. In this all-important first step, individuals learn the fine art of balancing their earnings with their expenditures, a fundamental skill for anyone looking to navigate their finances with confidence. - read more
Understanding what a credit score is and its importance is crucial for anyone seeking a personal loan. A credit score is a numerical representation of your creditworthiness, typically ranging from 0 to 1200 in Australia, provided by credit reporting agencies. - read more
In today's financial climate, many Australians find themselves exploring options to manage and optimise their financial commitments. One option gaining popularity is loan refinancing. But what exactly is loan refinancing, and how can it benefit you, especially without negatively impacting your credit score? - read more
Need Help Finding a Loan?
Find out now if you qualify and compare
rates, offers and options from multiple lenders - without a credit check!
All finance quotes are provided free (via our secure server) and without obligation. We respect
your
privacy.
Knowledgebase
Bond: A fixed-income investment in which an investor loans money to an entity that borrows the funds for a defined period at a variable or fixed interest rate.
