Budget hits ball back into the RBA’s court

The Reserve Bank of Australia and the Treasurer appear to be playing tennis with the economy. RBA Governor Stevens has already cut interest rates to 2.0% and hinted that he would like fiscal policy to provide more help. In last week’s Budget, Treasurer Hockey ignored this plea and left the economy facing a large fiscal squeeze. The ball is now back in the RBA’s court. Although we don’t expect any immediate action, the Budget lends some support to our view that rates may yet fall to 1.5%.