RBA effectively rules out rate hike in the middle of federal election campaign

RBA governor Philip Lowe. Picture: Jane Dempster

The Reserve Bank has effectively ruled out an official interest rate hike in the middle of the coming federal election campaign – and, for that matter, into at least the first weeks of the incoming Labor Government.

Let me hasten to add, RBA governor Philip Lowe has not done it on the basis of the ‘old belief’ that the RBA ‘closes up shop’ in an election campaign.

That’s a ‘belief’, that should have been well and truly buried anyway, when Lowe’s predecessor, Glenn Stevens, did hike interest rates smack in the middle of the 2007 campaign.

Stevens doing that was, in any event, far more striking that what Lowe could do now.

Stevens lifted the RBA’s official rate to 6.75 per cent, sending home loan rates above 9 percent.

Lowe – when he hikes, as he will, at some point – will be moving up from all-but zero, nudging home loan rates up from at or just over 2 per cent.

True, in 2007 the official rate was peaking – and then, as the GFC hit later in the year, essentially started its long fall to the 0.1 per cent it reached in November 2020.

Now, we are about to embark on the – at least partial – unwinding of all that.

The official rate will go up; just not yet, not in March, April or May and possibly not in June as well.

Reserve Bank of Australia governor Philip Lowe. Picture: Richard Dobson

That’s at least, as currently foreseen by the RBA.

Equally, at any time, election campaign or no campaign, the early days of an incoming new government, or at any other time, if the RBA decided it was necessary to hike, it would hike.

This all turns on the RBA’s new forecasts for the economy, which will be detailed in its major statement on Friday.

Particularly telling, was the way Lowe has front-end loaded an expectation of higher inflation in the CPI inflation numbers to be released by the ABS at the end of April, smack in the middle of the campaign.

Yesterday’s statement implicitly but clearly buried a rate hike not just now, but at the next two meetings, in March and April, as well – until the March quarter CPI numbers are produced by the ABS at the end of April.

Australian Prime Minister Scott Morrison. Picture: NCA/ Gary Ramage

Normally, annual headline inflation printing at well above 3 per cent – as it will; indeed it could very easily go above 4 per cent for the year to the March quarter – and, critically, underlying inflation above 3 per cent, would spark expectation of an immediate rate hike at the May RBA meeting. That meeting will be right at the sharp end of the election timing - as the election, if the PM is half-smart will be announced straight off the back of the planned ‘election budget’ on March 29; and if he’s quarter smart, it will be a short campaign of five or six weeks absolute maximum.

Lowe has effectively told the PM he can relax about a 2007-style hike.

But it’s the RBA belief that inflation will be subsiding by then, not the election coincidence, that pre-emptively rules out a May hike (and so June as well).

We shall see.

The RBA is not where the Fed is today – with US inflation running away at 7 per cent.

The danger though, is the RBA could be where the Fed was in April-May last year: ‘not-seeing’ inflation bubbling up to and over 5 per cent.

Whether the RBA is right all turns on what happens to wages and that in turn all turns on how quickly the inflow of foreign students, back-backers and other visa holders bulks up.

Lowe did not rule in a 2022 rate hike.

It will be interesting to see how he answers a direct question on that at Wednesday’s Press Club speech.