“And Leigh, they’re not cutting interest rates because the economy is doing well. Interest rates are being cut to 50-year lows because the economy is struggling,” the shadow treasurer said on the ABC’s 7.30, having already described rates as being at “emergency levels”.
That particular shadow treasurer was Joe Hockey in August 2013, when the Reserve Bank of Australia (RBA) cut the cash rate to 2.5 per cent.
It also could be the present shadow treasurer, Chris Bowen, next Tuesday if the RBA board cuts the cash rate to 1.25 per cent, as half the country’s economists are tipping.
And that would be an all-time low, not a mere half-century record.
It’s no surprise that the only debate Treasurer Josh Frydenberg has agreed to with Mr Bowen is on Monday, the night before the RBA meeting.
The RBA officially declaring all is not well with the economy after six years of Coalition government is not something Mr Frydenberg or Scott Morrison would relish as they continue to claim the Coalition is better at managing the economy than Labor.
Of course the RBA might not cut on Tuesday – it might wait until next month.
Whether it’s this month or the next, the money market is betting many millions that there will be cuts after inflation for the March quarter came in much lower than expected last week.
As measured by the consumer price index, there was no inflation in the latest period and only 1.3 per cent for the year.
The core argument put forward for the RBA sparing the government an embarrassing rate cut before the election is in one sentence of last month’s board minutes: “Members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances.”
The no-cut-in-May brigade points to “and unemployment trended up” as the key phrase, believing the RBA will sit pat as long as there is strong employment growth, hoping that eventually that growth will get wages and, therefore, inflation moving again.
But that overlooks the other half of the bank’s rate-cut scenario, “the scenario where inflation did not move any higher”.
The RBA didn’t countenance a scenario where inflation fell further, which is what has happened.
Maybe that overrides the unemployment qualification. After all, unemployment is a lagging indicator – if the RBA waits for unemployment to jump, it will be too late.
On such nuances do economic debates and interest rate bets rage.
AMP chief economist Shane Oliver – one of those tipping a cut next Tuesday – has written a nice explainer about the problem of inflation that’s too low. He believes it is now too risky for the RBA to wait until unemployment starts trending up.
There was indeed strong employment growth in March. But there has been lots of good employment growth for years that has still left real, take-home wages going backwards. Wages growth has been a failed RBA hope for most of this decade.
As an aside, analyst Pete Wargent found a small gem in the latest labour market figures: “It was interesting – to me at least – to note that with the unemployment rate to a few decimal places coming in at 5.0475 per cent, just another dozen unemployed folks in the survey could’ve collectively tipped the reported unemployment rate up to 5.1 per cent (imagine ze headlines…).”
Indeed, that could have provided quite a pre-election headline, unemployment jumping from 4.9 to 5.1 per cent. The joys of rounding numbers.
With the threat of the RBA meeting hanging over his head, we can expect Treasurer Frydenberg next Monday to be stressing the jobs growth story – it’s the only genuine number running in his favour.