EDITORIAL: Inflation data gives Labor a glimmer of hope a rate cut isn’t too far away

There’s a lot riding on interest rates.

Including, potentially, the fate of the Albanese Government.

A cut to the cash rate could help restore public confidence in the Government, which has taken a battering throughout this prolonged cost-of-living crisis.

Conversely, if the Reserve Bank decides to hold out a bit longer on extending mortgage relief, voter anger will further ferment, resulting in lost seats or the loss of majority government for Labor.

The good news, for both Anthony Albanese and mortgage-holders, is that there’s reason to hope a cut isn’t too far away.

Underlying inflation, the indicator relied upon by the RBA when making its decisions on rate cuts, fell from 3.5 per cent in October to 3.2 per cent in November. It’s still outside the RBA’s target range of 2-3 per cent, but it gives reason for optimism. Inflation doesn’t necessarily have to be within that range for the RBA to make a cut, but the bank must have reason to believe that things are sustainably heading in the right direction.

Quarterly data due out at the end of the month will give us a clearer picture of whether we’ve reached that point.

Bond markets already believe we’re there. They are now betting there is a 75 per cent chance of a rate cut at the next RBA meeting, up from 67 per cent previously.

That means Labor strategists are daring to dream one might come before the election, which must be held before May 17. With board meetings scheduled for February 17-18 and March 30-April 1, that gives the RBA two opportunities to cut rates before Australians go to the polls.

With so much at stake, it’s interesting to note that the actual relief offered to households by a single rate cut would be minimal.

A 0.25 per cent cut would save mortgage holders just $90-$100 a month off the cost a $600,000 home loan.

It would mean even less for the 31 per cent of Australian households who rent their homes. Their landlords won’t feel compelled to pass on any savings in their mortgages.

A rate cut would be a powerful signal that Australia has finally brought the inflation dragon to heel. But we haven’t emerged from the battle unsinged.

Three years of high inflation have pushed grocery prices way up. They’re still increasing, and they’re doing so off a higher base.

Once they’re up, there’s no coming back down.

That’s not to disregard the psychological impact a rate cut would have.

Dropping the cash rate this close to an election would open the RBA to criticism that it is playing politics. Holding back on a rate cut as a result of this fear genuinely would be political.

Speaking last month, the bank’s governor Michele Bullock said she would always follow the data — no matter what it was saying.

She’s given us no reason to doubt her word.