Odds firming for pre-election RBA gift for Anthony Albanese

Anthony Albanese could be given a pre-election gift of an interest-rate cut in February next year, but mortgage holders are likely to struggle for months longer than homeowners in other advanced economies.

Mortgage holders could receive a rate cut in February next year.

Anthony Albanese could be given a pre-election gift of an interest-rate cut in February, leading economists say, but the Reserve Bank’s caution in tackling inflation is likely to see mortgage holders struggle for months longer than homeowners in other advanced economies.

The RBA is expected to keep the cash rate at 4.35 per cent at its two-day board meeting beginning on Monday, with a February cut being predicted by ANZ chief economist Shane Oliver and ­independent economist Saul ­Eslake, while financial markets are expecting relief by December.

While the Bank of England cut rates last week and the US Federal Reserve is expected to so in September, Mr Eslake said the RBA’s strategy had differed from other central banks as it showed less urgency with bringing ­inflation back into its 2-3 per cent target band. He said a rate cut could be on the cards for February – just ahead of an election likely for March or May – but he would not be surprised if that was ­pushed back until later next year.

“It is entirely reasonable to ­expect the (US Federal Reserve) to follow the Bank of England, which cut rates last week, and the Bank of Canada that has done it twice,” Mr Eslake said. “But that doesn’t mean that the Reserve Bank of Australia is likely to follow anytime soon.”

Mr Eslake said two reasons Australia was an outlier was that inflation was higher and interest rates lower than in comparable economies, with the cash rate peaking at 5.5 per cent in the US and New Zealand, 5.25 per cent in Britain and 5 per cent in Canada.

Australia also differed in that major income tax cuts were rolled out this year, Mr Eslake said, while economist Chris Richardson said increased state and federal government spending made it harder for the RBA to cut rates.

“The Reserve Bank has consciously decided to tolerate inflation being above its target for longer than its peers are willing to tolerate being above their targets, which are all a bit lower than the RBA’s, in order to preserve … the gains that were made in reducing unemployment and underemployment to levels that were thought hitherto unsustainable,” Mr Eslake said.

“Although interest rates have gone up here more than anytime in the last 30 years, they haven’t gone up as much as they would have if the Reserve Bank had made another choice. The corollary is that they will stay at their current levels for longer.

“It is bad from the perspective of people who have a mortgage, it is good from the perspective of people who might have lost their jobs if the Reserve Bank had put rates up by more.”

With his reputation as an economic manager to take a hit if there is another rate rise, Jim Chalmers said the “momentum of inflationary pressures in our economy is downwards”.

“The economy is slowing as a result of higher interest rates, which are hammering consumption growth,” the Treasurer said. “By the time the board meets this week, interest rates will have been on hold for nine months.

“Inflation is still higher than we’d like, and it’s lingering around the world, but it is much lower than its peak and our policies are helping.”

Opposition Treasury spokesman Angus Taylor said it was an “indictment” on the Albanese government that inflation had risen in Australia since December when it had fallen in other ­advanced economies. “Australians face higher prices, higher interest rates and higher taxes for longer, because of Labor’s bad economic management,” he said.

Mr Oliver said the US was at risk of recession after July jobs data showed unemployment had risen to 4.3 per cent.

He said financial markets were expecting the official cash rate in the US to drop to 4.14 per cent by the end of the year, with two further 0.25 per cent cuts ­expected this year in Britain.

Mr Oliver said February was the most likely time for a rate cut in Australia, with relief for mortgage holders possible in November if the September quarter inflation data was “very low”.

“The money market no longer sees any further rate hikes in Australia and has fully priced a rate cut in December,” he said.

Mr Oliver played down Australia’s inflation – 3.8 per cent in the year to June – being higher than in other comparable economies as “nothing to get too alarmed about”.

“While much is made of Australian inflation being higher than in other countries this just appears to reflect the fact that it lagged other countries on the way up and so is just lagging on the way down,” he said.

Judo Bank chief economic ­adviser Warren Hogan said it would be the right economic call for RBA governor Michele Bullock to raise rates on Tuesday, but predicted last week’s softer than expected inflation result and moves to cut rates internationally would deter the central bank from punishing borrowers.

While there has been no jobs growth in the US this year, Mr Hogan said employment growth in Australia was more than double the pre-pandemic average at 40,000 a month. “The global economy and the US economy is slowing down but it is not at all clear that is going to happen here,” he said. “It just looks like inflation in Australia has stopped falling at around 4 per cent.”

Mr Richardson said the RBA had “deliberately gone carefully in the fight against inflation” and he did not expect a rate cut until after next year’s election. Former RBA board member Warwick McKibbin said it was a mistake for the Reserve to have not raised rates to about 5 per cent.