"Australian's treasury chairman, Scott, is going to announce a big budget deficit of more than 40 billions. There's an unexpected fall in tax revenues and Scott is going to cut-cut-cut
After that Glen Steven will announce his monetary speed as usual. "wait and see" mode.
...I think investors are likely to forgive the negative budget deficit and they will rate AUD higher due to the fact that the Treasury will fix the budget at all cost regardless economic conditions."
If Scottt decides to cut-cut-cut that would be contractionary and due to the fiscal multiplier for each dollar that he decides to cut from the budget the economy would be expected to shrink by more than a dollar. Under such scenario one would expect the central bank to ease the monetary policy as a means to offset the fiscal tightening. If so then Glen Steven would be under tremendous pressure to deliver a rate cut even if in his opinion the housing market could become in danger of overeating. In addition, I would say that foreign investors at this stage do not seem to be particularely worried about our deficit.
https://en.wikipedia.org/wiki/Fiscal_multiplier
