Analysis | Are Politics Getting in the Way of Australia’s Rate Hike?

Pretty much anything that happens Down Under now is viewed through the lens of the coming election, with the nation going to the polls May 21. While the Reserve Bank of Australia sets borrowing costs independently of Canberra, it hates getting dragged into partisanship. Nudging up the benchmark rate from near zero on May 3 would do just that. The last time the bank tightened during a campaign was in 2007, when then-prime minister John Howard, a conservative, counted on a strong economy to hold off Labor Party leader Kevin Rudd. Howard lost, and his team admonished the central bank. There was a lot more going on at the time — Howard’s support for the U.S. war in Iraq was deeply unpopular — but higher rates became part of the autopsy. 

RBA Governor Philip Lowe would probably prefer not to go there — and many economists doubt he will. They also say the case for a hike soon is strong. By waiting until June, Lowe may even need to lift the main rate by more than a quarter point, a bigger first step than analysts anticipated a few months ago. He’ll have the advantage of scrutinizing the Federal Open Market Committee’s May 4 decision, which may result in a half-point climb.

But does declining to act on the data test the very autonomy the RBA seeks to preserve? Like every central bank, the RBA operates within parameters set, ultimately, by the political class. Lest we forget, the bank doesn’t deliberate in complete isolation from the government, either; the top bureaucrat at Treasury, Steven Kennedy, sits on the RBA’s board. 

Neither incumbent Prime Minister Scott Morrison nor Labor leader Anthony Albanese have hinted that the RBA’s independence might in jeopardy. That said, both parties have pledged a review of the central bank after the election, the first in decades, even if they have been vague about the details. Some change is coming, no matter the victor. It’s understandable Lowe might not want to kick a hornet’s nest.

For his part, Morrison considers the thriving economy to be his best chance of a come-from-behind win. The premier has trailed in polls for much of the past year, partly because of Covid fatigue and in-fighting among his center-right bloc. Morrison’s term got off to a poor start with forest fires ravaging the southeast coast while he was on vacay in Hawaii. During the pandemic, Morrison struggled to get his way with state leaders wanting to pursue their own strategy. Hammering Labor on the economy is Morrison’s best, and perhaps last, hope. 

The current backdrop may be too hot even for the prime minister. The RBA said in minutes of its April meeting, released Tuesday, that inflation will probably breach its 2%-3% target in the first quarter. A worse-than-anticipated outcome could be a setback. Labor would have an opening to attack him on the cost of living and the inevitability of rising mortgage payments. It might raise the prospect that Lowe can’t wait until June. 

Albanese hasn’t done himself any favors. In the campaign’s opening week, he was unable to recall the unemployment rate when asked by journalists. He also didn’t know the RBA’s main rate. The ridicule that followed was deserved. 

If one of Albanese’s handlers is reading this column, write a Post-It note for the boss: CPI. 11:30 a.m. Wednesday. Morrison probably has his lines already worked out. Here’s a second date: Tuesday, May 3. The RBA monthly policy statement that afternoon ought to be a must-read rather than a placeholder.  

More From This Writer and Others at Bloomberg Opinion:

• How Biden Can Use Inflation to His Advantage: Karl W. Smith

• Recession Forecasts Are Just Shots in the Dark: Robert Burgess

• RBA Takes a Baby Step in From the Cold: Daniel Moss

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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