EDITORIAL: Compelling case for Reserve Bank of Australia to stay course on interest rates

According to the collective wisdom of Australia’s economists, a rate cut on Tuesday is already a done deal.

Money markets are pricing a cut at about 90 per cent.

The pressure on Reserve Bank governor Michele Bullock to meet that expectation is overwhelming.

If she does follow through, it would be the first reduction in the cash rate since November 2020.

Not only do the hopes of millions of Australian mortgage-holders depend on Ms Bullock’s next move, so too potentially, does the fate of this Government.

Prime Minister Anthony Albanese and Treasurer Jim Chalmers have made no secret of the fact they are urging on a cut. For all the Government’s lip service to the importance of respecting the central bank’s independence, Dr Chalmers’ comments about successive rate rises “smashing the economy” haven’t been forgotten.

This week’s RBA meeting may be the final opportunity to salvage the economic reputation of this Labor Government before an election is called.

Expectations of a downward adjustment are so strong that if the RBA holds steady, its effect on the national psyche would be akin to a rate hike.

But while every economist and his dog believes a rate cut is a fait accompli, the data says differently.

Yes, inflation has fallen off significantly since it hit a three-decade high of 7.8 per cent back in late 2022. Underlying inflation sits at a three-year low of 3.2 per cent — within sight but still stubbornly outside of the RBA’s target band of 2-3 per cent.

The temptation will be strong to unfurl the mission accomplished banner on Tuesday afternoon — or at least to hand mortgage-holders a small token of relief after they endured years of hardship.

The ramifications of an RBA decision have never been so significant.

But the case for a more cautious approach is compelling. Unemployment remains at record lows, consumers are spending again, business confidence is rising and crucially, labour productivity is going backwards.

That all points to the potential for a resurgence in inflation, as has occurred in the United States. Just a few months after the Federal Reserve cut US rates, inflation jumped from 2.4 to 3 per cent, which threatens to force the Fed to change course on its monetary policy trajectory.

To follow a similar path would be a significant blow to the RBA’s credibility, which has still not recovered from the battering it received from former governor Philip Lowe’s dodgy guidance in 2021 that rates would be unlikely to budge from their low base for years to come.

The flip side is that to defy strong expectations of a rate cut would be to invite criticism of the central bank’s signalling to markets.

The ramifications of an RBA decision have never been so significant.

Holding out a few weeks more — potentially until the RBA’s April meeting — would make Ms Bullock Australia’s public enemy No 1.

Sometimes though, it can pay to be the bad guy.