(Coles, don’t sue me.)
There’s been much chatter over whether the RBA would move rates for the first time in two and a half years. For that time, the RBA has been stuck like honey on the same interest rate in the hope that the economy would pick up. Today, it may have to make a move that even it wouldn’t have probably want to make. Some economists have been calling for a cut since last year and all of them agree that something just isn’t making sense in the economy right now.
Today, I’m giving you a primer on the nerds’ rationale for why this rate cut could happen as early as today and what a potential cut means for the parties as we head deeper into the election campaigning abyss.
EDIT: The RBA has since left rates on hold to make it 31 meetings in a row, on 1.5%. The board decided to leave rates on hold despite persisting global risks (trade wars, looking at you), uncertainty around the household consumption outlook and despite further improvement in the labour market. A brief scan from economists across the Twitterverse suggests they’re not surprised but they’re also frustrated because we’ve been in a growth protracted situation for some time, and yet the RBA does nothing when it theoretically had no better time than now.
What makes up the decision to cut or not cut?
Firstly, the mechanics of the decision – the RBA’s Board of Governors debate about whether to change the official cash rate (what we know as the “interest rate”) — their decision is released every first Tuesday of the month from February to December at 2:30pm.
No, I don’t think they have a big Messenger group chat to discuss the cutting of rates. And I’m fairly sure they would have something more secure than Google Docs to collaborate on their decision.
But here are the main factors that they take into account:
- What’s happening around the world (the strength of trading partners; what major economies are doing and what other central banks like the US Federal Reserve and the UK Bank of England are doing.)
- What’s happening at home:
- Unemployment figures (more people out of work = more chances of rate cut so it can encourage business to move out of saving and into hiring/spending)
- Inflation (lower inflation = people saving more and therefore, less consumption. The central bank doesn’t want too much of that)
- Business and consumer confidence (they can look at this through publicly available indexes)
- Housing and household debt (this has been a huge factor especially in recent years)
- Our currency (rate decisions — even doing nothing can impact the value of our dollar)
- Wider factors – like yes, wage growth.
So why could the RBA make this change?
While we won’t know the full explanation for a few weeks (the minutes from the meeting are always released well after the decision itself), some economists have been arguing that this cut has been staring at them in the face for months.
First, inflation is weak. And as we found out recently, it’s so weak that in the first quarter of 2019 – it went nowhere. Core inflation (the RBA’s main measure when it takes rate decisions into account) has now hit the lowest readings in its 16-year history of measurement. And as this fancy graph will show you, it’s been going down for some time:
In short, the graph is showing that price pressure doesn’t discriminate by industry and that it’s getting further away from the RBA’s target range rather than towards it. No matter what economist you talk to, they’ll tell you that this is just a bit of an alarm bell. (Incidentally, one thing going around is that the RBA could just simply change its target range rather than cut rates. However, I haven’t seen enough economists backing this idea yet to make a deal out of it … but it is there.)
Second, house prices. Oh – housing. The greatest necessary evil to our lives since Taylor Swift decided to release music. But seriously, house prices have been on the long decline down since last year and the peaks of earlier this past decade. Further to this, no one (well, almost no one) is willing to make a bet on when the fall will ‘bottom out’ — leaving everybody, including the RBA, all clued up. Greg Jericho of The Guardian made this chart to show its fall:
Not only that, the household debt to income ratio keeps going up. As of earlier this month, the debt to income ratio hit 190%. Consider that if you want to borrow, you’ll want as least interest as possible. If your debt is nearly twice your income — and you expect interest rates to fall — what do you bet’s gonna happen? (Hint: Lowering interest rates increases incentives to borrow.) The RBA has said it’s not “alarmed” yet by these figures but it is keeping watch on it.
Finally, low unemployment should have meant more spending and further to that, more for your paycheque. But as we’ve seen over the last few years – that’s not happening. Wages even formed a major part of the RBA’s last set of minutes so you can tell they’re really paying attention to this factor. If it doesn’t cut today, the RBA will need to consider what effects like the tax rebates kicking in on July 1st will really do to stimulate yours’ and my spending.
So how does this affect the election?
Any rate changes during a federal election campaign are never flattering for the incumbent government. In fact, the last two times a rate cut occurred during a federal election campaign: there was a change of government. And before you all get partisan and vitriolic on me – the scores are Coalition 1 – 1 Labor.
So they’re all at fault, I hear you cry! Maybe — but the problem is the Prime Minister is campaigning fiercely on his party’s economic record. Jobs, you hear him say. Growth, he’s also said in the past. It’s all true — Australia just broke the world record (officially) for the most years without a recession in a row. But if Labor gets their way — and wages, climate change and water buybacks overtake the dominant discourse — the election night result could be an even bigger blowout than some of the pundits are already talking about.
But don’t let me tell you about it. Prove it (or disprove it) with your ballots in 11 days’ time.