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01-07-2024
SYDNEY: Australia’s Treasurer Jim Chalmers said on Sunday he was confident cuts to income taxes from Monday would not exacerbate price rises, as the nation suffers a cost-of-living squeeze amid stubbornly high rates of inflation.
The consumer inflation rate reached a six-month high of 4.0% in May, adding to pain for families battling soaring living costs and lifting the chances of another interest rate hike this year from the Reserve Bank of Australia.
The central bank has held interest rates steady at a 12-year high of 4.35% for five meetings, but has raised rates 425 basis points since May 2022 as inflation runs beyond its 2% to 3% target band.
Addressing media in Queensland state capital Brisbane, Chalmers said the government was “confident but not complacent about inflation in our economy” when asked about the impact of the tax cuts, which trim benefits to the wealthy and give low-income earners more breaks.
The tax cuts were about “ensuring that Australians earn more and keep more of what they earn,” Chalmers said, according to an official transcript.
“Our strategy here is to provide substantial, meaningful and responsible cost-of-living relief at the same time as we fight inflation,” he said.
Under the centre-left government’s policy, people earning up to AU$135,000 ($88,763) will fall into lower tax brackets from July 1. Tax breaks for some high-income earners will nearly halve, with the savings redirected to those on low incomes.
Labor Prime Minister Anthony Albanese said in January that the Treasury informed the government that the tax breaks were broadly revenue neutral, supportive of jobs, and would not stoke inflation.
Australian consumer inflation accelerated to a six-month high in May, while a key measure of core prices rose for a fourth month, figures that caught traders off-guard and prompted markets to raise the chances of another interest rate hike this year.
The Australian dollar climbed 0.5% to $0.6684 and the three-year bond futures tumbled 18 ticks to 95.93, their lowest level in three weeks.
Markets moved to imply a 60% chance of a quarter-point hike from the Reserve Bank of Australia by November, up from a non-existent probability before the data, with a move likely in August depending on the outcome of the full second-quarter CPI report.
Futures also priced out any chance of a cut in the 4.35% cash rate this year, with the prospects of a first easing delayed until late 2025. .
Data from the Australian Bureau of Statistics on Wednesday showed its monthly consumer price index (CPI) rose at an annual pace of 4.0% in May, up from 3.6% in April and well above market forecasts of 3.8%.
A closely watched measure of core inflation, the trimmed mean, climbed to an annual 4.4%, also its highest level in six months and up from 4.1%.
UBS and Deutsche Bank now see a rate hike in August while the National Australia Bank delayed the call for the first easing to May 2025, compared with November previously.
George Tharenou, chief economist at UBS, expects the second quarter CPI to come in at a quarterly rate of 1.1%, above the RBA’s own forecasts.
“Our new CPI forecasts make a rate hike in August a ‘close call’… However, we see enough evidence to change our base case view,” said Tharenou, adding that there is also a risk of a follow-up hike most likely in November.
With inflation still running above its target band of 2-3%, the RBA has warned it is alert to upside risks. It has held interest rates steady at a 12-year high of 4.35% for five straight meetings. (Int’l Monitoring Desk)
