Terry McCrann: Reserve Bank decision is not cut and dried

Tuesday’s Reserve Bank interest rate decision could have a huge impact on your life — especially if it impacted the tempo of the election campaign and even more if it impacted the result, writes Terry McCrann.

Tuesday’s Reserve Bank interest rate decision could have a huge impact on your life — especially if it impacted the tempo of the election campaign and even more if it impacted the result.

What most don’t realise, though, is that the decision still pales into relative insignificance — for you — in comparison with decisions being made outside of Australia and developments taking place out there as well.

The good news, the really good news, is that those decisions and those developments are looking positive and indeed, arguably increasingly very positive. Not that, you’d — generally — read about it.

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Now, the local rate decision is significant for this reason alone. It is the first time in the more than two-and-a-half years that Philip Lowe has been governor that there is even actually the possibility of an official rate change from the RBA.

The last change was a cut from 1.75 to 1.5 per cent under his predecessor Glenn Stevens in August 2016. Lowe became governor the next month; starting that September and at every other meeting since he has left the rate unchanged at that 1.5 per cent.

It really is quite extraordinary: more than a third of his seven-year term as governor has already passed and, on the surface, he’s done nothing. Although, as I’ve noted before, that’s deceptive: like synchronised swimming, there’s a frenzy of activity and — in the RBA’s case — analysis, taking place below the surface.

For most of his first year and indeed beyond that, Lowe was being urged by the economentariat to raise rates.

Despite publicly noting that the next RBA move — crucially, when and if it came — was likely to be a rise, it never came.

Indeed, more importantly, there was never a serious possibility of a rise at any of the specific RBA meetings — the issue was never ‘live’. The economentariat was wrong.

And the same has been the case since the RBA switched to a so-called ‘neutral’ bias: saying that the next move — again, critically when and if it ever happened — could be either a rise or a cut.

Whatever which way the RBA jumps on Tuesday, it will change its position. After the very low March quarter inflation figures, one thing is absolutely clear — the RBA will dump the “either a rise or a cut”.

The RBA has three choices: announce an immediate cut to 1.25 per cent; all-but announce a cut, but at the next meeting in June, after the election; or adopt an “easing bias”. That could be of varying intensity, from “we really think we will be making a cut at some point” to the “we have no present intention of cutting but we’ll keep watching very closely”.

Reserve Bank governor Philip Lowe. Picture: AAP

Whatever the RBA does it will impact financial markets; it will impact the property market; it will impact the economy and it will impact the election dynamics.

I would critically note, the election obviously aside, what’s happening overseas will have far more impact on these matters than the RBA decision.

As I have written over the past two weeks, I suggest that the RBA will most probably leave the rate unchanged, but shift to that ‘easing bias’; but there is a possibility of a cut.

Again, as I’ve written for years, the RBA would not let the election determine what it did. But it is all-too aware of the unavoidable political consequences.

A cut would work to undermine the government’s claim that the economy was in great shape. But not cutting — especially if it indicated it would cut after the election — could also be seen as playing politics.

As to the substance it is important to grasp two seemingly conflicting points.

First, a cut from 1.5 to 1.25 per cent really ain’t that significant. It’s not going to re-fire the property market; it’s not going to unleash an economic boom — or save us from a recession. And exactly the same applies to the rate being left at 1.5 per cent.

At the same time a cut would send out ripples that could develop into tsunamis — especially into how global markets behave towards Australia. Less so, for no change.

Yes, a cut could be the nice little push that’s just what we need — to stabilise property, to help household budgets, to boost business. It could also prove all-but unnoticed.

As I’ve explained over the past two weeks, it’s what’s happening on Wall St, to the US economy and in China which is having a big impact and a big impact right now.

It’s all been positive and it keeps being positive — even the ‘no news’ out of China.

Overnight Friday saw another surge in US jobs — the jobless rate there is down to 3.6 per cent, a level not seen since well back into the 20th century. Wall St surged back to its all-time highs.

I can’t promise the same for Australia, but it’s the reason why our market isn’t 20 per cent — maybe even 30 per cent lower.

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