By Shane Wright
The Reserve Bank is now trapped - and Anthony Albanese could not be happier with its predicament.
Wednesday’s inflation figures, by any measure, would ordinarily seal the deal on an interest rate cut when the bank board meets over February 17 and 18.
Back-to-back quarters of headline inflation at just 0.2 per cent. Prices falling across most parts of the economy, and not just because of government subsidies for electricity and rent.
Today’s inflation figures play into big decisions ahead for Prime Minister Anthony Albanese and RBA governor Michele Bullock and her board. Credit: Nick Moir, Wolter Peeters
For the first time since the end of free childcare during the pandemic, the price of almost half of all goods and services is climbing by less than 2 per cent. In early 2022, about 80 per cent of everything measured by the Australian Bureau of Statistics was growing by more than 3 per cent.
Unless the RBA reckons the past six months is an inaccurate picture of what’s playing out in the nation’s malls and shopping strips, it has the evidence in front of it that it now has to start slicing interest rates.
Obviously, with Albanese fuelling up the prime ministerial BMW for a drive to Government House to call an election, any move by the Reserve to slice interest rates has political ramifications.
But not cutting in February would be unduly political.
Prices for everything from pets (now at minus 0.7 per cent after hitting 19 per cent two years ago) to dishwashing liquid (minus 2.1 per cent after a pandemic peak of 13.1 per cent) are falling or below the RBA’s 2-3 per cent target band.
Home-building costs are the single largest item in the consumer price index basket of goods and services. Inflation in this sector hit an eye-watering 20.7 per cent in mid-2022.
It actually fell by 0.2 per cent in the quarter to reach an annual rate of 2.9 per cent (with the monthly measure of inflation showing it down to 2.3 per cent).
Underlying inflation, at 0.5 per cent, is now at its lowest level in three years and continues to ease. Annualised, underlying inflation is running at the bottom of the RBA’s target band.
The slowdown in inflation has come even as unemployment has remained about 4 per cent, with more than 440,000 jobs created over the past year. That suggests the bank’s in-house estimate of the jobless rate which isn’t putting upward pressure on inflation – 4.5 per cent – is too high.
Wages growth is easing across all sectors. Sightings of the bank’s long-feared “price-wage spiral” are as rare as those of thylacines in suburban Hobart.
Further supporting the case for a rate cut is the poor performance of the economy (a per capita recession running for 21 months) while research from Westpac suggests that 75 per cent of the stage 3 tax cuts – which experts feared would drive a consumer spending spree – have been socked away in bank accounts.
The interest rate rise during the 2007 election is long remembered within the Liberal Party. But the Coalition benefited from the bank’s decision during the 2019 campaign to sit on its hands when it was obvious the economy was struggling.
It waited until three days after Scott Morrison’s re-election to declare the economy was not growing fast enough before signalling it would use its next meeting to start a string of cuts that eventually took the cash rate to a then-record low of 0.75 per cent.
The 2019 decision was made at a time when the bank board met every month. Now, with at least six weeks between board gatherings, trying to avoid an election campaign rate cut would run the real risk of holding the cash rate steady until at least the middle of May, if not later.
Credit: Matt Golding
Not only would that undermine perceptions of the RBA’s independence, it would have substantial economic ramifications.
Bank governor Michele Bullock has held a strong line since taking over the RBA, running the case that interest rate increases – while painful – were necessary to bring inflation to heel.
Wednesday’s figures suggest that pain has succeeded and that it’s time to give the economy some reprieve. She and the rest of the RBA board have no other option.
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