The Reserve Bank of Australia is designed to be independent of government, but that does not mean its decisions do not have political consequences.
After Wednesday’s better-than-expected inflation reading, there is now broad consensus among economists that the RBA will cut interest rates next month.
While the treasurer, Jim Chalmers, has repeatedly said he would refrain from giving “free advice” to the bank, a rate cut or two coupled with lower inflation would be welcome before a federal election, due by May.
On Wednesday, Chalmers said the government was “focused on beating inflation and helping with the cost of living”. As for the Liberals, he said: “Peter Dutton and the Coalition are focused on conflict and culture wars, and they would make people worse off and take Australia backwards.”
The consumer price data showed that essential goods and services – such as food, petrol and some housing costs – are now recording smaller price rises, which will be welcomed by households.
Headline inflation, reduced in part due to the government’s energy rebates, has fallen to an annualised 2.4%, the lowest level since March 2021.
These figures, coupled with an anticipated rate cut, can help shift the community vibe after years of grappling with seemingly endless and elevated inflation. Reduced interest rates would also boost the economy because it becomes cheaper for people to borrow money to buy stuff, including homes.
The inflation data isn’t, however, all sunshine and rainbows.
While the rate of price increases is dropping, everything is still very expensive, posing a problem for Labor’s reelection chances in what is expected to be a tight race fought on cost-of-living policies.
The data shows food prices are still increasing at an annualised 3% – or 6.3% for fruit and vegetables – on top of already significant price rises of recent years.
Services inflation – that includes rents, education, hospital services and insurance – is tracking at an elevated 4.3%.
Victory path
While a pre-election rate cut is widely seen as positive for incumbent governments, it doesn’t necessarily represent a path to victory in itself.
In the US, the Federal Reserve cut its benchmark rate by a jumbo 0.5 percentage points in September last year.
The Democrats, then in power, seized on the decision as evidence of their inflation-fighting work, before being soundly beaten just weeks later, with the cost-of-living crisis too firmly entrenched for voters to change their minds.
On cue, the shadow treasurer, Angus Taylor, said on Wednesday that Chalmers had been “patting himself on the back” when the “pain is far from over”.
“We’ve got a treasurer more interested in spin than substance, more interested in rhetoric than reality, but the reality of Australian families and Australian businesses – and we’ve seen it here today – is the pain continues,” Taylor said.
Then, there’s also always a chance that the RBA opts against cutting rates on 18 February by pointing to the recent jobs data, arguing that the labour market doesn’t require stimulus, which would rob the government of momentum.
We might not have an election date yet, but the battle lines are clearly drawn. The question for the government will be whether they can lift voters out of their cost-of-living malaise.
Expect peripheral political issues to be replaced by a straight up shootout over cost-of-living policies, with essentials such as housing at the forefront.
