Federal budget 2023: Interest rates shock after big-spend budget

The big-spending federal budget has increased the risk of two more interest rate hikes in coming months, homeowners were warned today.

The big-spending federal budget has increased the risk of two more interest rate hikes in coming months, homeowners were warned today.

Betashares chief economist David Bassanese said “the second Labor Budget under Treasurer Jim Chalmers is unambiguously expansionary, with a boost to GDP growth equivalent to around 1.5 per cent over the next two years.

“This adds to the risk that the RBA will feel the need to raise interest rates at least once and possibly twice more in the coming months,” Mr Bassanese said.

Mr Bassanese said “the sad reality is that the second Chalmers Budget again makes no real effort to tighten the budget to support monetary policy in helping to rein in inflation” or the structural deficit.

Meanwhile another economist has pushed back the timing for when he expects the Reserve Bank of Australia to begin cutting, from later this year to 2024.

Following Jim Chalmers unveiling a total of $20.6 billion in new spending – much of it boosting household incomes – Goldman Sachs economist Andrew Boak told clients the budget had a “hawkish” read-through for monetary policy.

The big-spending federal budget has increased the risk that Philip Lowe will raise interest rates yet again.

Federal treasurer Jim Chalmers hands down the 2023 budget. Picture: NCA NewsWire/ Dylan Robinson

“Our base case is for a final 25 basis point (bp) rate hike in July, following confirmation of another large annual reset in the minimum wage and utility prices. However, the risks are skewed to more tightening being required and potentially as soon as next month’s board meeting,” he said.

UBS’s George Tharenou “thinks there is an increasing risk it will raise the cash rate again by another 25bps to 4.10 per cent, with the most likely timing in July after the minimum wage decision, or potentially in August after the second-quarter consumer price index (CPI) outcome”.

‘Risks skewed to more tightening’.... Chief Australia Goldman Sachs economist Andrew Boak (R).

“Further out (and) more definitive is we also now think the RBA is unlikely to cut the cash rate this year,” Mr Tharenou said.

“Specifically, we formally push back our expectation of the first RBA easing to February 2024.”

He had been anticipating November 2023 to be the start of a series of cuts.

Prior to today, Mr Tharenou had been predicting a total of 125 basis points of cuts. He now forecasts only 100bp by the end of next year.

The budget’s main cost of living relief came via power bill discounts, which the government has said will lower the CPI next financial year.

However, some economists believe households will end up spending the money saved on electricity, adding to demand and ultimately inflation.

The RBA is trying to lower inflation from seven per cent to three per cent by reducing household demand.