Morgan Stanley
  • Research
  • March 5, 2021

Plotting Australia's Policy Paths

As Australia’s recovery momentum continues, debates on policy paths are starting to emerge.

Australia's economic performance was resilient in 2020 and, as we approach pre-COVID activity levels, investor focus is increasing on the policy pivots to expect this year. Morgan Stanley’s Australian research team recently took a deeper dive into three key areas of focus: 

  • Reopening Pace
  • Fiscal Transition
  • Monetary Reaction

A gradual reopening

We expect Australia's continued strict quarantine and control measures will mean a relatively gradual further reopening of the economy - particularly for travel. This will be dependent on the domestic vaccine rollout, with international border restrictions looking unlikely to ease before October. This will provide some headwind to growth and may mean that the relative economic outperformance seen in 2020 is not repeated, although we don't think it challenges the broader recovery.

Fiscal transition underway

Crisis stimulus is expected to be removed, as planned, with enough savings buffers and underlying economic strength to mitigate the impact on spending. Importantly, the transition to growth stimulus is well underway with measures already in place (income tax cuts, business tax incentives) and we expect the May 2021 Budget to be a catalyst for further measures, as would a Federal election which can be called from August this year.


JobKeeper will expire for the remaining ~1 million workers receiving it at the end of March, although this is already significantly lower that the ~3.6m that received it during Q2 & Q3 last year

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Source: Commonwealth Treasury, Morgan Stanley Research

Stage 3 income tax cuts remain legislated for FY25 - we don’t expect them to be accelerated this year but it does limit the likelihood of a shift to fiscal conservatism

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Source: Commonwealth Treasury, Morgan Stanley Research

Monetary reaction to lag

We expect the Reserve Bank will retain its unconventional policies for most of this year, with another A$100bn Quantitative Easing (QE) package expected through to January 2022 (linked to other central bank purchases and the AUD), and the 3Y yield target retained until November 2021 (where we expect it will be adjusted to a date target). Macro-prudential measures will be the primary option to address any housing-related leverage concerns, but are unlikely this year. We expect the RBA will fulfil its expectation to not hike rates until 2024.


Housing credit is well below levels that would be a concern to the RBA

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Source: ABS, Morgan Stanley Research

And rates of risky lending are also still subdued

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Source: APRA, Morgan Stanley Research


For more on the debates taking place in each of the above three policy areas, speak to your Morgan Stanley financial adviser or representative.  Plus, more Ideas from Morgan Stanley's thought leaders.