After months of better-than-expected economic data, especially around growth and jobs, there’s now growing evidence that an official interest rate cut might be becoming more likely — and not for the reasons that have grabbed all the attention in the last 24 hours.
After the Reserve Bank board meeting yesterday in Hobart, the bank’s comments about the recent rise in the value of the dollar grabbed all the attention:
“The Australian dollar has appreciated somewhat recently. In part, this reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role. Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.”
Cue speculation about an interest rate cut to deal with an overly strong currency (ah, what wouldn’t Wayne Swan have given to have had the problem of an Aussie dollar at 76 US cents?). But go down to the final paragraph of yesterday’s statement and read it against the background of a weaker start to the year in economic indicators. Just this week we’ve seen that retail sales growth is weak-to-flat (0.3%, 0% in January and February) and the nearly year-long decline in building approvals is continuing. On top of that, there was a small fall in car sales in March, ending months of continuing rises, while the good news on trend unemployment in the second half of 2015 hasn’t continued into January and February (the March data are out next week; to the extent we can believe them, they’ll be an important indicator of how the labour market is faring).
Thus the bank:
“Over the period ahead, new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing. Continued low inflation would provide scope for easier policy, should that be appropriate to lend support to demand.”
Note both the scepticism about the labour market performance and that last phrase — and keep them in mind as the flow of data continues in coming weeks. If they continue as they have been for the first two months of the year, start colouring in “rate cut looms” into your economic cliche collection. This could end up being more important than the value of the dollar, which will add a small amount of disinflationary pressure to an economy that has been untroubled by inflation now for two years.
Now think about how a rate cut might play given the looming election campaign that — to the extent it is not already underway — is likely to stretch from budget week in May (when the RBA next meets) all the way til July 2, just before the July meeting. Interest rate movements during campaigns used to be enormously controversial — remember the shock that attended the RBA shifting rates upward during John Howard’s last campaign in November 2007, a move some dared to suggest was faintly political, but which certainly didn’t help address the perception that Howard had let spending get out of control.
A campaign rate cut in 2013, however, didn’t help Kevin Rudd. By that stage the electorate had moved beyond the simplistic “rates up = bad, rates down = good” narrative the media tended to peddle, helped somewhat by the likes of former treasurer Joe Hockey claiming low interest rates — the Howard-era ne plus ultra of good economic management — were evidence of poor economic management because they meant low growth. “Interest rates are being cut to 50 year lows because the economy is struggling,” Hockey said during the 2013 campaign, while casually inventing the concept of “sustainably low” interest rates, which, presumably, were low interest rates that happened while the Coalition was in government.
Bearing in mind that an RBA cut would take rates to 1.75%, or 75 basis points below the level Hockey was talking about, PM Malcolm Turnbull and Treasurer Scott Morrison may yet need some fancy rhetorical footwork of their own to explain to voters why yet lower rates are evidence of good economic management.
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