The Reserve Bank of Australia makes no promises about what will happen next with interest rates.
But one thing is clear: Whether they stay high or fall in the coming months, neither scenario is based on good economic news.
This week, New Zealand cut its official cash rate by half a percent, in response to worsening economic conditions.
If we don’t see rates falling here in Australia, the only reason will be that the upward pressure on inflation has remained too strong, to the point that the RBA is not prepared to risk entrenching it with an early rate cut.
It would be the board’s equivalent of monetary policy punishment for politicians’ poor fiscal behavior. That is, excessive spending by state and federal governments thus fuels inflation.
By contrast, if rates drop suddenly, either late this year or early next year, it will be because the economy is weakening sharply and the RBA is prepared to replace its concerns about high inflation with fears of recession.
The first becomes the lesser of two evils.
If the Reserve Bank lowered rates, it will be because the economy is weakening dramatically. Above, Governor Michele Bullock
In such a scenario, the RBA might be willing to cut rates pre-emptively to avoid a rise in unemployment.
It would be a vote of no confidence in the state of the economy, not the kind of assessment Labor would welcome.
As can be seen, neither scenario is particularly promising for a government seeking re-election, unless it can time its race so that it goes to the polls after a rate cut, but before the recession takes effect. economy that is expected to follow soon.
That may well be the window through which Labor hopes to leap electorally.
The finer details of what was happening economically, which led to the rate cut, would be lost in the numbing world of political spin.
Labor would falsely use the rate cut to claim victory in the “fight against inflation”, while falsely arguing that it is running a strong and robust economy (before said economy falls off a cliff shortly after elections).
Labor could use that shift to good effect to overcome its poll disadvantage on the issue of economic management in the eyes of voters.
Equally important, scheduling the election to travel this narrow path would send voters to the polls before the next budget is passed, which is likely to reveal all sorts of deteriorations in Australia’s economic performance, along with cost explosions that reflect efforts to buy votes. with gifts.
Not to mention the ever-rising trajectory of recurrent spending on explosive programs like the NDIS.
The above scenario is actually in play, with the latest RBA minutes removing the following wording that was included in the previous monthly minutes, that the cash rate target was “unlikely to be reduced in the near term”.
That line no longer existed in the September minutes, a sure sign that the RBA is concerned about the weakening economy with the threat of rising unemployment.
Anthony Albanese and Jim Chalmers are thinking deeply about the economic window they want to try to get through, before time runs out.
And it is not surprising. Not only has Australia missed the opportunity over the past decade to institute major economic reforms to establish future prosperity (a bipartisan failure), but the global economy is also now on life support.
International economic problems are particularly worrying in China, Australia’s largest trading partner.
When China sneezes, Australia catches a cold and right now China is sneezing.
This emerging development also requires a delicate electoral calendar. WA is the state hardest hit by the recession in China. However, right now WA’s economy is still (for the most part) booming.
A strong WA economy stands in the way of the Coalition regaining seats lost in the 2022 election in the west when the state turned against Scott Morrison.
If Labor can go to the polls before the good economic times in the West stop, it could retain most, if not all, of the seats it won in 2022.
However, if WA starts to feel the economic squeeze before Albo gets to an election, it’s not hard to see Western Australians punishing the federal Labor Party for the worsening economy when they cast their votes.
All of which adds up to a delicate set of considerations for the Albanian government as it tries to align its ducks to help secure a second term in power.