Grattan on Friday: US rate cut puts pressure on RBA

Reserve Bank Governor Michele Bullock might need her flak jacket when she fronts the media next Tuesday after the bank’s two-day board meeting.

This week’s United States Federal Reserve interest rate cut of a hefty half a percentage point (defying most more modest predictions) will put a lot of public pressure on the RBA, which is expected to hold Australia’s official rate at 4.35%.

Bullock (who must surely abandon musings about a rate hike) can argue Australia’s situation is different – that inflation remains too high and unless that’s dealt with, we’ll all end up worse off.

Also, US rates are still above ours, and it has healthy productivity growth, unlike Australia. Moreover, economists say the sheer size of the US cut is sending mixed messages, boosting confidence because rates are being cut, but harming confidence because they are a sign that the outlook is weak.

Thursday’s strong Australian employment numbers again showed the paradox of a buoyant labour market in an economy that’s barely breathing.

Regardless of the debate about rates among the experts, the big US move will certainly make the RBA’s stance harder to explain to families having trouble paying their mortgages costs and living expenses.

Bullock recently acknowledged the position of those really badly off in an analysis inevitably carrying the cold edge of financial reality.

“For owner-occupiers with variable-rate loans […] we estimate that around 5% are in a particularly challenging situation,” she said.

“Although this group is fairly small overall, those in it have had to make quite painful adjustments to avoid falling behind on their mortgage repayments. This includes things like cutting back on their spending to the more essential items, trading down to lower quality goods and services, dipping into their savings or working extra hours. Some may ultimately make the difficult decision to sell their homes.

"A really important point to note here, is that lower income borrowers are over-represented in the group of people who are really struggling,” she said.

The person faced with selling their home doesn’t take comfort from being in a small minority.

Whether or not the Reserve Bank’s expected Tuesday stance not to reduce rates is correct policy, it could face even more criticism on Wednesday, when the monthly inflation figures come out.

Westpac, in its regular CPI preview, expects these to show inflation falling 0.2% in August, to be at 2.7% annually. That would put the annual rate within the 2-3% band, where the RBA wants it. Moderating inflation in August was the effect of the budget’s energy cost rebate.

The monthly CPI figures are less reliable than the quarterly ones. But if the August numbers are good, many voters are likely to be angered by the bank having sat on its hands.

That’s especially when they recall Treasurer Jim Chalmers’ observation about high interest rates “smashing” the economy. Reports of differences between the bank and the government will likely be back in the news.

Chalmers, meanwhile, is highlighting Friday’s start of the budget’s increase in rent assistance, as well as the latest indexation increases in various payments kicking in. He’s seeking to frame the economic debate as between Labor’s cost-of-living cushions and the opposition’s search for cuts in government spending.

Peter Dutton’s strategy of holding back until closer to the election most details of what a Coalition government would do has tactical advantages and drawbacks. Put out the measures and they are open to attack, or theft, by the government. Keep them under wraps and they’re even more vulnerable to scare campaigns.

The government has two scares already on the go: that the Liberals would rip away the bag of workers’ rights the Albanese government has introduced, and that they would take a knife to spending in essential areas.

Labor jumped on opposition finance spokeswoman Jane Hume saying on the ABC at the weekend: “The government has spent an additional $315 billion since coming to government that the Coalition would not have committed to and didn’t commit to back at the last election”.

The government is making a giant meal of this, regardless of Hume insisting “we will not be cutting essential services”.

Albanese told a Thursday news conference: “The Coalition are promising $315 billion of cuts. They see the indexing of aged pensions, they see the increased support for child care and aged care, they see the increased investment in social housing, they see the increased investment in a Future Made in Australia, including the National Reconstruction Fund – they see all that as being waste”.

Chalmers documented all the indexation increases that are in the $315 billion.

The Liberals will have to spell out their proposed cuts ahead of the election. But past experience tells us whatever a party says beforehand, the later reality is often different. This goes for both sides of politics.

The government is presently under more pressure than at any point in its term. The prime minister is not popular. Time is running out with many initiatives still undelivered. The government is hugely frustrated that the Senate, which earlier gave it an easy run, is blocking bills, on housing in particular, thanks to an unholy alliance of Coalition and Greens (the government hasn’t quite got to the point of invoking Paul Keating’s description of the Senate as “unrepresentative swill”).

The conventional wisdom, on the basis of the polls, is Labor appears headed for minority government. A Freshwater poll this week had the Coalition leading Labor on a two-party basis 52-48%, which if translated to an election would give the Coalition a chance of forming minority government.

The polling is primarily reflecting an adverse judgement on the government. To the extent it can keep that as the lens, the Coalition maximises its chances of taking a lot of skin off Labor. Labor, for its part, needs to swing the battle from a referendum on it to a choice – between a government, however flawed, that people know, and an alternative that would be something of a leap in the dark.