Could the tax Cuts from the Budget backfire and force up interest rates?
by Ivan Fletcher, 18/05/06

Inflation is already close to the reserve Banks preferred upper limit, and equity markets are strong.  The budget was stimulatory, so will it drive inflation further and hence another interest rate rise?

The Bad – Why rates could go up again before end of the Year

• Budget Stimulation - underlying cash shrinks from 1.5% to 1.1% of GDP

• Companies pass on rising fuel costs.

• Accelerating global growth.

• Rising labour and material costs.

• Possible rebound in household spending and strong business investment.

The Good - Why interest rates won’t rise again this Year

• Budget SURPLUS still high and within RBA comfort range

• Households save most of their tax and family payment handouts or pay down debt.

• Recent interest rate rise will start to impact consumers.

• Household debt is high.

• Petrol prices slow down spending.

• Cheap imports from China may start challenging manufacturing sector.