Australian Dollar: Fiscal loosening and contained wages – TD Securities

TD Securities’ Global Strategy Team says Australia’s 2026/27 Budget is slightly stimulatory, with looser fiscal policy and more upbeat Treasury forecasts than the RBA. They also note Q1 wages matched expectations and remain contained for now, but higher short‑term inflation expectations could lift wage bargaining, leaving the RBA with potential for further policy tightening if Treasury’s outlook proves accurate.

Budget and wages keep RBA on tightening watch

“The 2026/27 Budget papers reveal a significant improvement in the underlying cash balance of A$45b over the forward estimates. “

“This budget is slightly stimulatory. The headline deficit increases from a deficit 1.6% of GDP in 2025/26 to 2.1% in 2026/27 and the headline cash deficit is projected to deteriorate vs the underlying over the next few years by roughly A$6.4b vs prior estimates. It’s not substantial, but the implication is that fiscal policy is a touch looser over the forecast horizon.”

“Further, Treasury’s economic forecasts are more upbeat than the RBA’s. If Treasury’s forecasts are closer to the mark, then the RBA may have more policy tightening to deliver. Meanwhile, conservative commodity options leave room for narrower deficits.”

“Australia Q1 wages came in as widely expected at 0.8% q/q, (cons: 0.8%, TD: 0.8%) with annual wages coming in at 3.3% y/y. The result was in line with RBA’s May SoMP forecast and explains the muted reaction in markets.”

“Despite rising inflation pressures and a tight labour market, wage pressures are still contained for now though that may shift soon.”

“The RBA expects that higher short-term inflation expectations will be a factor in wage bargaining over the next year as workers seek to preserve real wages.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)