How the Reserve Bank decision on interest rates will impact your life

All eyes will be on the Reserve Bank on Tuesday, when it decides whether an interest-rate cut is needed to re-energise the national economy — but how will affect South Australians? It depends on who you are.

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All eyes will be on the Reserve Bank on Tuesday, when it meets to decide whether an interest-rate cut is needed to re-energise the national economy.

The most politically-charged meeting in more than five years follows last week’s release of surprisingly low inflation figures, which has sparked rising speculation of a rate cut just 11 days before voters head to the polling booths.

Inflation — a key measure of the strength of an economy — fell to zero in the March quarter, and just 1.3 per cent on an annual basis.

Underlying inflation, which strips out quarterly volatility, was just 1.4 per cent in the year to March — far below the RBA’s target range of 2-to-3 per cent.

With inflation tracking below the target range in 16 of the past 18 quarters, most analysts believe the RBA will be forced to move on rates for the first since August 2016.

Like many other economists, AMP Capital chief economist Shane Oliver believes the cash rate will be cut by 25 basis points, to a new low of 1.25 per cent, in order to maintain the credibility of the inflation target.

“We had thought that the RBA would prefer to wait till after the election is out of the way before starting to move and (the) coming fiscal stimulus from July also supports the case to wait, as does the still strong labour market,” he says.

“However, with underlying inflation coming in much weaker than expected, it’s arguably too risky to wait until unemployment starts to trend up.

“And the RBA has moved in both the 2007 and 2013 election campaigns. So, while it’s a close call, our base case is now for the first rate cut to occur at the RBA’s May meeting.”

AMP Capital chief economist Shane Oliver

Governor of the Reserve Bank of Australia (RBA), Dr Philip Lowe. Picture: Dean Lewins/AAP

In 2007 the RBA hiked the cash rate by 25 basis points to 6.75 per cent just weeks out from the election in which Kevin Rudd took ­office from John Howard in a landslide victory.

On the second day of the 2013 election campaign, both major parties seized on an RBA rate cut as proof they could do a better job of managing the economy.

SA Centre for Economic Studies director Michael O’Neil says while the Reserve Bank’s decision will have a political impact, it has a duty to put economics before politics.

“Household consumption has slowed, there is the ongoing story about a lack of wage increases and people have been dipping into their savings to keep their spending up,” he says.

“With falling house prices, particularly in Sydney and Melbourne, there’s a wealth effect as well, and when people feel less wealthy they start to save.

“The Reserve Bank prides itself on managing the macroeconomy — whether there’s an election campaign on doesn’t matter — they can’t afford to make a big mistake.

“The economics of it is much more dominant than the politics of it — the Reserve Bank has to play the economy first.”

While an interest-rate cut would be generally welcomed by mortgage holders, business borrowers and exporters, it could mean even more pain for self-funded retirees and others who rely on savings held in term deposits, savings accounts and other low risk investments.

However, Mr O’Neil believes any political impact could be muted by the fact interest rates have been at record lows for close to three years.

But that’s unlikely to stop both major parties from using next week’s interest rate decision as an opportunity to talk up their economic credentials.

Opposition Leader Bill Shorten jumped on last week’s soft inflation figures, suggesting it showed the “anaemic weakness in the current Government’s economic management”.

The Prime Minister meanwhile, said it was a reflection of the Government’s policies on driving down costs for childcare and electricity.

Flinders University senior lecturer in politics and public policy Rob Manwaring says while both parties will spend the coming days finessing their messaging, any potential rate cut is unlikely to be a game-changer for either party.

“Bill Shorten has said he doesn’t blame the RBA for any of the problems in the economy — he points the blame squarely at the Government, so for Labor they’ll say it’s a clear sign the Government doesn’t have particularly strong economic credentials, while the Government will say jobs growth has been strong,” he says.

“I think we’ll see a flurry of news coverage for a day or two and then the election will roll on.

“Interest rates don’t really tend to have an impact on who people decide to vote for — what’s more important is who they have more confidence in managing the economy.”

IF THE RBA CUTS RATES

Winners:

Households with mortgages

Businesses and others borrowing to invest

Exporters — lower interest rates typically result in a lower $A, making Australian goods more competitive on the global marketplace.

Losers:

Retirees and savers — falling returns from term deposits, savings accounts and bonds

Banks — harder to attract deposits and lower revenue from loans

Importers — lower interest rates typically result in a lower $A, making it more expensive to acquire goods overseas.