Albanese Government knows it will take more than an interest rate reduction to win the election

Despite this week’s new inflation figures putting Australian households firmly within reach of a desperately needed interest rate cut, Labor is far from celebrating, writes Clare Armstrong.

Lower than expected inflation numbers on the eve of an election are the kind of political gift any incumbent government struggling in the polls dreams of.

But despite this week’s new figures putting Australian households firmly within reach of a desperately needed interest rate cut, there were no subtle knowing looks between Labor ministers, let alone gleeful high fives behind closed doors.

The message running through the party was clear: this doesn’t change the plan.

Headline inflation dropping to 2.4 per cent and the “underlying rate” – currently viewed by the Reserve Bank as the more meaningful measure – down to 3.2 per cent, on paper could have had Albanese Government ministers jumping for joy on Wednesday.

Instead, Jim Chalmers’ press conference shortly after the Australian Bureau of Statistics update was far from a victory lap.

Though he observed the worst of the inflation crisis had now passed, the Treasurer was at pains to emphasise the results did not mean “mission accomplished”, as he acknowledged the economic hurt still being felt across the economy.

Australian Treasurer Jim Chalmers’ press conference shortly after the ABS update was far from a victory lap. Picture: Nadir Kinani / NewsWire

As Chalmers addressed the cameras in this careful tone, behind the scenes an equally cautious message was rippling through both the Labor Party caucus and campaign HQ.

Despite markets now pricing in a 75 per cent chance of 0.25 per cent cut to the current 4.35 per cent cash rate in February, the government is not counting any chickens that might hatch from underneath the Reserve Bank’s boardroom table.

Having watched voters unceremoniously turf incumbent governments out of office amid deep household economic pain, Labor MPs remain nervous about the extent to which the Albanese Government’s own assistance measures have cut through over the past three years.

Many have moved to adopt Chalmers’ language around the economy, from highlighting that when Labor took office inflation had a “six” in front of it, to now having a “two”, that unemployment has remained relatively low and the budget is in far “better nick” than was previously forecast under the Coalition.

Independent economist Saul Eslake.

But it’s no secret the electorate is not ready to celebrate these achievements, because while inflation has moderated, real household disposable income has declined significantly as costs have demonstrably gone up.

Chalmers talks about trying to achieve a “soft landing” out of the inflation crisis, and independent economist Saul Eslake says for the economy and the labour market this has been the case, but for household incomes there has been serious pain.

“Unemployment hasn’t gone up very much, no one gives a government credit for that, because it’s something that hasn’t happened,” he says.

“Whereas price increases, and a decline in household real disposable income has happened.”

Eslake says it’s clear the RBA kept interest rates too low for too long and that combined with Morrison government-era spending policies have made Labor’s job harder.

“But as (ousted former world leaders) Joe Biden, Chris Hipkins or Rishi Sunak could tell you, people who are on the bridge when the ship hits the iceberg get the blame,” he says.

Despite this reality, most Labor MPs believe there is still time to turn around the public’s perception of the government’s handling of the cost-of-living crisis.

But there remains deep division over whether handing down another budget will be the best way to launch this final bid.

Some MPs privately fear delivering a set of books firmly in the red will further erode any of Labor’s credibility on economic management, while others are hopeful it could be used to set out a fresh policy outlook and clearly define the priorities of a second term Albanese Government.

Whether delivered through a budget on March 25 or as commitments for a second term should Prime Minister Anthony Albanese call the election early, cost of living measures currently being deliberated by the government are not of the magnitude of previous years.

Prime Minister Anthony Albanese needs to turn around the public’s perception of the government’s handling of the cost-of-living crisis. Picture: David Crosling / NewsWire

In the past, Labor has moved on a wide range of assistance measures from increasing rent assistance, to cutting pharmaceutical costs and delivering energy bill subsidies.

But senior Labor sources have cautioned this time around measures will be tapered back due to the tougher budget situation.

Despite the shift to longer term structural reforms, some form of extension on the energy bill relief – currently set at $300 for every household delivered in $75 instalments quarterly – remains a live option.

The successive years of power bill subsidies for businesses and households has substantially impacted overall headline inflation, with the latest December quarter data showing the cost of electricity had fallen 9.9 per cent in the previous 12 months.

According to the Australian Bureau of Statistics, that cost would have actually been an increase of 0.2 per cent without the government’s intervention.

One senior Labor minister says no decisions have been finalised, but insists a pre-election rate cut will in no way factor into the policy decisions.

It’s a similar story at Labor campaign headquarters, where sources say the increased prospect of a February cut “doesn’t change anything” in terms of the party’s campaign plans.

The election team is operating on the assumption the Reserve Bank will “do what it will do” and its strategy will not be “hostage” to that.

Former Gillard government minister Craig Emerson has said the RBA ‘has every reason to cut the cash rate’ in February. Picture: Jane Dempster

A source familiar with election preparations says Labor is also being careful not to over-estimate the impact of a rate cut on voting intentions.

The view is that the mood in the electorate regarding the economic outlook is improving, but this will not translate directly to increased support for Labor.

Instead, this attitude shift is seen as an opportunity to take the election debate beyond immediate hip pocket relief and expand into a broader “bread and butter cost-of-living agenda” on health, energy, education, housing and childcare.

While Labor officials may not be banking on any rate cut, some figures within the party have become increasingly vocal.

Former Gillard government minister Craig Emerson declared this week the RBA “has every reason to cut the cash rate at its February meeting and no good reason to keep it on hold”.

He’s also previously taken aim at arguments that for the bank to cut rates so close to an election would be a political move, pointing out that to not do so on that basis would itself be political.

It wouldn’t be the first time the RBA has shifted rates during an election cycle, with the board having delivered interest hikes both during the May 2022 and October 2007 campaigns.

But Eslake says the board’s past actions should be interpreted as a “very clear signal” the RBA will “do or not do what it thinks … without regard to the electoral cycle”.

Originally published as Albanese Government knows it will take more than an interest rate reduction to win the election