RBA could loom over election with rate cut

The Reserve Bank could cut interest rates as early as next month amid a soft run of economic data in recent weeks.

Reserve Bank governor Philip Lowe. Picture: AAP

The Reserve Bank could cut interest rates as early as next month — a move which would coincide with the federal election campaign — as economists say a soft run of data in the recent weeks could force the central bank’s hand.

UBS chief economist George Tharenou now expects the RBA’s commentary to shift further in a “dovish” direction at its May meeting, while AMP Capital chief economist Shane Oliver says every meeting is now “live” and the RBA should consider cutting in April.

Disappointing economic growth, retail sales, home loans and business and consumer survey data in the past week has seen the money market anticipate a 25-basis-point interest rate cut in August from November previously, and it has moved rapidly toward anticipating another 25-basis-point rate cut by April 2020. That would take the cash rate to a new record low of 1 per cent from 1.5 per cent now.

A May cut would coincide with a federal election campaign with a poll expected to take place later that month. With a rapidly slowing housing market, the economy is expected to be key political battleground. The last time the RBA moved on rates during an election campaign was in August 2013 when Tony Abbott returned the Coalition to government. At the time the RBA cut the official cash rate just two days after Kevin Rudd called the election.

The consensus among market economists is currently for no change in rates this year or next and some say a major fiscal stimulus would be the best way to deal with the “per capital recession” in the Australian economy.

But some who previously expected interest rate hikes in 2020 have abandoned that view and there has been a rapid rise in the number of economists expecting renewed monetary policy stimulus, with AMP Capital, Capital Economics, NAB, Nomura, Macquarie, JPMorgan and Westpac predicting two cuts this year.

Moreover, while the growing band of economists expecting renewed monetary policy stimulus say it’s likely to start in July, based on the timing of national accounts data, some who were among the first to predict cuts said it could happen as soon as May and possibly April.

Mr Tharenou of UBS said that with consumers this month turning the most risk-averse since the global financial crisis and sentiment toward property investment hitting a record low, the only “positive” economic data now was the state of the labour market, where unemployment was holding at 5 per cent and job growth continuing at 2.2 per cent per annum.

“However, leading indicators are beginning to turn, with ANZ’s job ads data now falling, and NAB capacity utilisation data now just below average,” he said. “With momentum clearly slowing, we expect the RBA to shift further in a dovish direction, and introduce an easing bias at the May meeting. However, if the labour market softens earlier than we expect, and inflation is low, we can’t rule out a cut in May.

AMP Capital’s Dr Oliver — who began predicting rate cuts in early December after national accounts data for the September quarter showed an unexpected collapse in economic growth — saw a rising risk that the RBA’s 2-3 per cent inflation target will lose credibility.

“For several years now the RBA has been forecasting inflation to move back towards the midpoint of the target range,” he said. “But these expectations have proven way too optimistic (and) the danger is that the longer inflation remains below target the more it will be expected to remain down and the harder it will be to get it up, as the experience in Japan and Europe demonstrates.

“All of which is an argument for the RBA to cut rates sooner rather than later.”

Dr Oliver also saw an argument for the RBA to cut rates at its April 2 board meeting — the same day as the federal budget — in order to avoid suggestions of political interference, in the event that a cut in May was justified, given that the federal election is due by May 18.

“We had thought that this would not occur till August, and after the budget and election were out of the way so the bank could get a chance to assess any fiscal stimulus, but the run of weak data is increasing the risk that the first cut will be sooner,” he said.

If the RBA were to wait for the unemployment rate to rise before cutting interest rates, it would “run the risk of being too late” to prevent a more severe downturn, given current evidence of a slowdown exacerbated by falling house prices.

While interest rates movements during election campaigns aren’t without precedence in Australia — the RBA hiked interest rates during an election campaign in November 2007 — it drew considerable criticism. In the most recent interest rate easing cycle, the RBA cut rates in May 2016, thereby avoiding cutting in an election campaign that year.

A fall in Australia’s 10-year bond yield to a 2.5-year low of 1.95 per cent yesterday “is a sign that the market thinks the RBA risks leaving it too late”, Dr Oliver added. The Australian dollar is likely to fall below US70c as RBA rate cuts will push the spread between Australian and US rates further into negative territory. At minus 87.5 basis points, it is already the most negative in at least three decades.

While ANZ head of Australian economics, David Plank, predicted steady rates through 2020, he said an easing soon as May was a “possibility” in the event of weak labour force data and soft March quarter inflation data, due on April 24. “Should it look as if the unemployment rate is trending higher, we think the RBA will act quite quickly,” he said.