Federal budget 2024: ‘Upwards pressure on inflation’: economists’ ominous forecast over interest rates

The federal budget has reduced the chances of an interest-rate cut this year and put “upwards pressure on inflation”, top economists have warned.

The federal budget has reduced the chances of an interest-rate cut this year, top economists have warned.

The CBA economics team on Wednesday said “we had flagged that fiscal policy was one of the risks to our base case that monetary policy easing would start in November this year and that the neutral cash rate of close to 3 per cent would be reached by the end of 2025.”

The cash rate is currently 4.35 per cent.

“The risk is now more real that the first interest rate cut could be delayed and that the neutral cash rate is higher than we currently estimate due to the expansionary fiscal setting and the high level of investment in the economy,” the CBA economists said.

KPMG chief economist Brendan Rynne said that ahead of the budget, he had highlighted the “growing disconnect between monetary policy and fiscal policy, with one pressing on the brakes and the other pushing down on the accelerator.

“The government has chosen to push its foot down even harder,” Mr Rynne said on Wednesday.

“A neutral, even slightly contractionary, budget would have been in order to help tackle inflation. But this is not a budget designed to consolidate the nation’s fiscal position and commence the task of gradually returning the budget to a sustainable position.

“Even though the economy is weak, the budget is too stimulatory, adding to demand, with little impact on supply. This places inevitable upwards pressure on inflation,” Mr Rynne said.

The PM and Treasurer at Parliament House, Canberra on Wednesday. Picture: Tracey Nearmy/Getty Images

“The government’s inflation forecasts are materially different to the latest RBA forecasts. If the government is wrong, then the implication is for the cash rate to stay higher for longer; which will in effect could result in higher mortgage payments that would more than offset any cost of living relief provided in the budget.”

Betashares chief economist David Bassanese said “if households decide instead to lift spending in a meaningful way, not only are rate cuts unlikely anytime soon there would be a very real risk of higher interest rates.

“As a result of the budget, I now see a 40 per cent chance of a rate rise this side of the next federal election, up from only 10 per cent.”

In contrast, Westpac economists said the budget wouldn’t cause a “material” change to the RBA’s plans.

The CBA team added that the “large budget deficits projected in the out-years … will have a direct impact on the required borrowing for the government and raise net debt in the years ahead, from an estimated $499.9bn (18.6% of GDP) as at June 2024, net debt is now expected to grow to $697.5bn (21.9% of GDP) as at June 2028.”