Political hot air should not shape RBA rates decision

A cut in the cash rate on Tuesday, expected by more than 90 per cent of financial markets, will be the best outcome for hard-pressed home loan borrowers only if it does not exacerbate the destructive effects of inflation, especially on the most vulnerable. The board is best placed to make a responsible call after assessing national and overseas economic conditions, as reflected in Reserve Bank of Australia governor Michele Bullock’s clear, detailed explanations after previous board meetings. While reflecting the anxiety of hard-pressed borrowers to see rates fall, government politicians, facing an election within weeks, are not an objective source of advice to the board. Trying to look in touch with their constituents, backbenchers Mike Freelander, Graham Perrett, Brian Mitchell, Rob Mitchell and Sam Rae intervened. “I want a cut,” Mr Rae demanded petulantly. Brian Mitchell urged board members to get off their computers and go into the streets to see what is going on in the real Australia. Dr Freelander and Mr Perrett are hoping for a cut of 50 basis points, well above market expectations. At least Dr Freelander acknowledged he was a pediatrician, not an economist. Rob Mitchell urged the RBA to deliver a 50-basis-point cut by April. If there was no cut, “it is going to need some very big explaining”, he claimed.

As former Treasury assistant secretary David Pearl wrote on Monday, Ms Bullock is trying to tread a narrow path sticking to policy principles while avoiding a public split with Jim Chalmers. Despite the federal Treasurer urging Labor members to say little about a rates cut, frontbenchers also waded into the fray on Monday. Environment Minister Tanya Plibersek stated the obvious – “mortgage holders are hoping for a rate cut” – and Assistant Immigration Minister Matt Thistlethwaite said household borrowers “deserve some rate relief”.

Peter Dutton also joined the chorus to score a point: “I really hope, for the sake of Australians who have had 12 interest rate increases under Mr Albanese, that there is a 25-point cut, or if it’s more than that, that’s fantastic, but families need relief,” he said. Nor has Dr Chalmers always been as restrained in standing back from the board’s deliberations. In early September he complained that the RBA was “smashing the economy” with its aggressive run of rate hikes. “With all this global uncertainty on top of the impact of rate rises, which are smashing the economy, it would be no surprise at all if the national accounts on Wednesday show growth is soft and subdued,” he said. He also described earlier interest rate rises as “harsh and heavy”.

Markets are factoring in more than a 90 per cent chance of a cut, which economists from the four big banks anticipate will be 25 basis points. But the case for a fall is not clear cut. In the December quarter consumer price index, the RBA’s preferred measure of underlying inflation, known as the trimmed mean (which looks at the middle 70 per cent of the CPI basket after removing the top and bottom 15 per cent of price movements), was 3.2 per cent, just above the central bank’s 2-3 per cent target range. The downward trend, however, has fuelled hopes of a cut. But after 13 rises, a single fall would not be a silver bullet for tight household budgets.

Judo Bank chief economist Warren Hogan, who has warned the RBA against cutting rates on Tuesday, said a cut could spell trouble for homeowners later in the year. “If they do go tomorrow, I think there’ll be a very cautious guidance from the governor, in her press conference as well as in the policy statement,” Mr Hogan told Sky News on Monday. “There’s a very good chance that it’ll be a one-off and then it’s really anyone’s guess what the next move will be, and it could easily be a hike later in the year or next year.” That would be the last outcome borrowers need. Once the fall starts, they need the trend to continue.