The Australian Government releases its Budget 2016 tonight but before it does, the Reserve Bank of Australia will need to make a decision on whether to cut further its official cash rate.
The RBA has an OCR of 2% and the market is pricing in a 58% chance of a rate cut to 1.75%. It will release its decision at 4pm New Zealand time.
The New Zealand dollar rose to an eight-week high against the Australian currency as investors considered the potential of a rate cut today.
Craigs Investment Partners broker Peter McIntyre said March quarter inflation was much weaker than expected last week, making this week's RBA meeting all the more interesting.
‘‘One problem for the RBA, if it does want to move, could be the Federal Budget is released later that evening.
‘‘The RBA might prefer to take action after it has seen the impact of any policy changes - and on a day where it will get more attention and will have an easier time communicating any important messages.''
The RBA's key consideration would be how long low inflation would continue and whether it signalled demand was shrinking, he said.
The Budget would be delivered at 9.30pm New Zealand time. With the Government having planned a double dissolution election for July 2, and polls reflecting a close contest, the Budget took on more significance this year, Mr McIntyre said.
The Government would be trying to achieve the successful delivery of some voter-friendly policies, while quietly increasing taxes to raise revenue. At the same time, it would want to keep markets and rating agencies content Australia was heading back to surplus in a credible way.
Some slippage was expected on the latter front and the surplus was likely to be pushed out a year, to 2021-22, he said.
Corporate tax cuts could also be in order. The tax rate for large corporations could fall from 30% to 28.5%, bringing it in line with the tax rate for small businesses.
‘‘On the other side of the coin, taxes on superannuation could become harsher, possibly by reducing thresholds where higher rates kick in. Tobacco excise taxes could increase and there could be changes to negative gearing rules for property investment.''
Despite a likely positive reaction to some of those announcements, such as corporate rate reductions, those could be limited, given the unclear political landscape in the short term, Mr McIntyre said.
The Malcolm Turnbull-led Government would invest an extra $A1.2billion ($NZ1.31billion) in schools but seek to impose new conditions on the states and territories to get the money, Fairfax Media reported.
The Government had already publicly announced it would contain a $A50million city infrastructure plan, a $A5billion dental plan and restored funding for the corporate regulator ASIC.
It will also scrap the high-income earner deficit reduction levy.
It might provide some sort of stimulus to small and medium enterprise but it was not likely to include any changes to negative gearing, capital gains tax or the GST.
