Economists pencil in rate cut before poll as inflation steadies
The bank's board meets on Tuesday, August 6, at a time when the election campaign could be under way. Reserve Bank governor Glenn Stevens has made it clear in the past that election campaigns do not prevent him from adjusting rates as he thinks he should.
"If it is clear something needs to be done I do not know what explanation we could offer the Australian public for not doing it, regardless of when the election might be due," he said in 2007, shortly before lifting rates during the 2007 campaign.
The consumer price index climbed 2.4 per cent in the year to June. But the bulk of the increase - 1.4 per cent - took place in just one quarter, last September, as the carbon tax was introduced and the private health insurance rebate was made less generous.
In subsequent quarters inflation climbed by no more than 0.4 per cent per quarter, equivalent to an annualised rate of just 1.6 per cent, well below the Reserve Bank's target band of 2 to 3 per cent. Mr Stevens has already made it clear the RBA "looks through" the price consequences of the carbon tax in setting rates and it is understood to be also prepared to look through the consequence of the last year's changes to the private health insurance rebate, meaning the inflation rate the bank targets is now below the bottom of its band.
But a rate cut next month is not a done deal. The bank regards inflation as allowing rather than necessitating a cut. Since the board left the cash rate steady at a half-century low of 2.75 per cent this month, most economic indicators have weakened. On Wednesday China reported the slowest pace of manufacturing growth in 11 months. The weaker economic outlook, particularly the weaker Australian employment outlook, will encourage the Reserve Bank board to move in August.
Another cut of 0.25 points would take most standard variable mortgage rates below 6 per cent.
"The decision is a coin toss," said Commonwealth Securities economist Savanth Sebastian. "We are pencilling in a rate cut."
The data shows the first sign of price rises after the dramatic slide in the dollar which began in May. Prices subject to international trade rose 0.3 per cent in the June quarter after sliding 2.8 per cent over the previous six quarters. More encouragingly, the prices shielded from international trade climbed an unusually low 0.5 per cent. The Reserve Bank sees this as a sign that wage pressure is easing as job markets weaken.
Treasurer Chris Bowen described inflation as "well contained".
Mr Bowen is working on an economic statement expected next week. It will include updated budget forecasts understood to have wiped $6 billion off government revenues over four years and will outline the cost of the Papua New Guinea asylum-seeker deal and measures to fund it.
Frequently Asked Questions about this Article…
Economists see a rate cut before the election as a close call, or 'coin toss,' thanks to fresh data showing inflation settling below the Reserve Bank's 2-3% target band. While it's not guaranteed, a rate cut in August is quite possible given the current economic signals.
The RBA looks 'through' temporary inflation impacts like the carbon tax and changes to private health insurance rebates. When excluding these, inflation is actually below the target range, allowing the bank to consider easing rates to support the economy.
The RBA treats the carbon tax as a one-off price shock and does not base its interest rate decisions on this temporary inflation rise. This approach helps the bank focus on the underlying inflation trend rather than short-term spikes.
Besides low inflation, weaker economic indicators—like a slowing manufacturing sector in China and a softer Australian employment outlook—are encouraging the Reserve Bank to consider cutting rates to stimulate growth.
A 0.25% rate cut would likely push most standard variable mortgage interest rates below 6%, which could reduce monthly repayments, providing relief to homeowners and investors with variable-rate loans.
The Reserve Bank sees low growth in prices sheltered from international trade—just 0.5% in the last quarter—as a sign wage pressures are easing. This implies the job market is weakening, which could slow inflation further.
Most economists, including Commonwealth Securities' Savanth Sebastian, consider the August rate cut decision a 'coin toss'. While they are penciling in a cut, the RBA has left the door open, depending on how the economy unfolds.
The Treasury's updated forecasts—which have already factored in a $6 billion revenue reduction over four years—will help shape government spending and economic policy. These updates might influence the RBA’s future rate decisions, as they impact overall economic confidence.
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