Despite budget deficits ‘as far as the eye can see’, the cash rate will likely remain on hold for most of 2014 before it once again begins to rise, according to AMP.
Shane Oliver, head of investment strategy and chief economist at AMP Capital, said economic news coming out of Australia is mixed – but it should be better.
“The news flow out of Australia hasn’t been so positive, with the announcement of yet another deterioration in the outlook for the budget deficit, with the release of the mid-year budget review – with deficits are far as the eye can see – mainly reflecting a further lowering in nominal growth assumptions,” he said.
“Note though that there is a big element in this of the new government wanting to paint as bleak a picture as possible to help set the scene for significant spending cuts in the May Budget and then engineer a turnaround.
“Based on the Treasurer’s comments, the clear focus will be on spending cuts as opposed to tax hikes and in the interest of boosting productivity in the economy, this is the best way to go. The cuts to projected spending growth are likely to focus on welfare, health and possibly education. With the tailwind from the mining boom largely over and the impact of the aging population set to hit in the decade ahead, I doubt we have any choice really.
“While Australia’s budget deficits and net debt (peaking at 16 per cent of GDP) are low by US, European and Japanese standards and ratings agencies don’t seem too fussed, the latest deficit blowouts remind us again how badly our public finances have gone despite the biggest boom in our history, which should have left them in good shape.”
Mr Oliver said despite the negative news, AMP continues to believe rates will remain steady for most of 2014.
“On the interest rate front, the minutes from the last RBA [Reserve Bank of Australia] meeting and parliamentary testimony from Governor Stevens reiterated that while the RBA has not closed the door on cutting interest rates again, it would prefer not to with borrowing costs not being a constraint on growth signs rate cuts have not got some traction and limitations on how much monetary policy can do anyway,” he said.
“Rather, the Governor’s focus remains on jawboning the Australian dollar lower and rightly continuing to advocate the case for ‘pro-growth, pro-productivity, confidence building reforms’.
“While the risks to Australian interest rates remain on the downside, our view remains that the most likely outcome over the year ahead is for interest rates to remain on hold at 2.5 per cent, ahead of eventual rate hikes late in 2014 as the economy starts to pick up.”