UBS: Weak fiscal triggers bigger rate cuts

Via UBS:

Implications: smaller than expected stimulus raises risk of early/more RBA cuts

Overall, as we flagged, the Budget improved modestly due to higher commodities & fiscal conservatism, with the surplus profile supporting the AAA. Household tax cuts & handouts were much smaller than expected; while infrastructure & public demand slow sharply. With credit tightening causing the largest housing downturn in history & a negative wealth effect, a significant share of (only modest) tax cuts will likely be saved or used to repay record debt. Hence, the Budget reinforces our already below consensus GDP outlook for a sharp slowing to 1.9% y/y in 2019. We still expect the RBA to shift to an explicit easing bias in May, before cutting rates by 25bp in both July & August; but the lack of material stimulus raises the risk of earlier & larger cuts.

Hello Josh Recessionberg.


  1. I wonder what chance we will see a mini Budget around August/ September should Labor win the election? The reason I mention it is 10 or 11 months is a long time for a new Govt to be in before it announces its first Budget or so it seems to me

      • They will and politically they must. Their first priority will be to open the books, gasp in horror, claim the Libs have lied, and immediately start to blame the Libs for where we are. Then roll out an emergency budget.

        This is politics 101. Either side would do it. The fact that our economy is slumping and they actually need to do it is just a coincidence.

      • Exactly. Labor need to make the Liberals own the coming “Domestic Financial Crisis” (DFC TM).

  2. Why wait for July. Signal it in May and in the SoMP wait for the election and then deliver in June. Follow up in august and November taking OCR to 0.75 on its way to ZIRP

  3. strange to see so much focus on surplus in regard to AAA rating when everyone knows that all of banks debt is going to become government debt anyway

    • strange to see so much focus on anything, when a sovereign currency-issuing nation can never default on its debts unless it chooses to

      • At least UBS understands the causality

        INSUFFICIENT government deficit –> poor growth —> only solution left is rate cuts to provoke more private debt

      • You have no idea what default is. But let me esplain as clearly as I can. As a sovereign, you may either explicitly default by not making any further debt service payments OR you can print the money you need to pay your bills (including interest payments). This is an indirect default because you are debasing the currency in which your debts are denominated. Said otherwise, your debtors will not be repaid the full value of the original loan. Venezuela has not defaulted on its sovereign loans however the currency in which its debts are denominated is worthless.

        Coming to a first world country near you. Watch for MMT and other such absurd wheezes for clues on timing.