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Australian Government To Cut Taxes

Published 07/05/2018, 11:18
Updated 31/08/2022, 17:00

Last week, as broadly expected, the Reserve Bank of Australia held the Cash Rate Target at 1.5%. Amid the release of the statement, the volatility increase temporarily as investors try to read between the lines; however, the Aussie quickly stabilised and even eased slightly as the greenback rose across the board.

The RBA maintained its well-known caution, especially regarding developments in the FX market, saying:

On a trade-weighted basis [the Australian dollar] remains within the range that it has been in over the past two years [...] An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Nevertheless, Governor Lowe was quite optimistic regarding the growth outlook and remained confident that China’s growth will stay solid. The Bank expects that growth will average 'a bit above 3% in 2018 and 2019' as non-mining business investment continues to increase. Nevertheless, the institution expressed reserves about the outlook for household consumption, naming high debt level and slowing growth of income as source of uncertainties. We told you, the statement was well balanced. Overall, the RBA seems to be happy with the current situation and sees no reason to change the monetary environment. Indeed, the bank just raised its core inflation forecast to 2% from 1.75%.

However, investors’ attention have already shifted towards the Australian Federal Government that is about to announce the details of the upcoming tax break. The government is hoping that Australians will spend this extra cash and bolster the economy. Treasurer Morrison will give the details of the tax cut next Tuesday and there is a strong chance that it will be good surprise for Australian taxpayers. Indeed, thanks to higher tax revenue for the 2017/2018 fiscal year, Scott Morrison will most likely have the pleasure to announce a smaller cash deficit than previously estimated. Nevertheless, international investors rarely welcome tax cuts and will most likely remain doubtful about the positive effects it may have on the economy, especially against the backdrop of slowing wage growth.

Over the last two weeks, AUD/USD fell 4.30% and bottomed at $0.7473 on May 1st. Since then, the currency pair stabilised around $0.75. We suspect the announcement could lead to an Aussie rally as investors anticipate it would translate into stronger growth. However, on the longer term, it increases the difficulty for the government to close the budget gap.

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