Australia's Prime Minister and the country's Treasurer said yesterday they were confident A$36.7 billion ($45.2 billion) in income tax cuts announced in Tuesday's Budget would not force the central bank to raise interest rates.
Treasurer Peter Costello announced the tax cuts, to be implemented over four years, just a week after the independent central bank raised interest rates to offset inflationary risks partly generated by consumer spending.
He said that record petrol prices might push annual consumer inflation above its current rate of 3 per cent, but underlying inflation, which excludes volatile items such as food and energy prices, would remain within the bank's target range of 2 to 3 per cent.
Prime Minister John Howard backed that view.
"The fundamentals of the Budget are anti-inflationary," he told Australian radio. "You shouldn't believe for a moment that this Budget will add to the pressure on interest rates."
Analysts generally agreed, but said the Budget's moderate stimulus to the economy would leave the central bank anxious.
Michael Blythe, chief economist at Commonwealth Bank of Australia, said the tax cuts amounted to 0.6 to 0.7 per cent of gross domestic product.
"That sort of fiscal stimulus would normally not rock the boat too much. But in an economy where inflation risks are skewed to the high side, the Budget is unlikely to soothe concerns held by the Reserve Bank," he said.
However, financial markets priced in an increased risk of a further rate rise this year with 90-day bank bill futures implying a yield of 6 per cent by the end of the third quarter and the Australian dollar hitting an eight-month high.
The Reserve Bank of Australia raised interest rates to 5.75 per cent from 5.5 per cent earlier this month, the first increase in 14 months. It declined to comment on the Budget.
Howard said the Budget handouts did not mean he was planning an early general election.
- REUTERS
Costello confident Budget handouts won't lead to interest rate hikes
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