The prospect of lower borrowing costs presents the RBA with two main risks, both of which are worth considering – and then putting aside. They are that the central bank becomes embroiled in politics a week before the May 18 federal election, and that it revives a property boom many felt couldn’t, and shouldn’t, go on forever.
The politics of Reserve Bank Governor Philip Lowe acknowledging all isn’t entirely well are problematic so close to balloting, especially when there is a very real prospect of the incumbent losing. Prime Minister Scott Morrison hasn’t publicly tried to nudge the central bank; that could change in coming days.
The RBA has adjusted rates during campaigns a few times, though it tries not to make a habit of it. Borrowing costs were raised during the 2007 campaign, which saw John Howard defeated by Kevin Rudd. In 2013, the bank cut. The first of those two adjustments during the political season caused a fracas; the second less so.
The key point is that life went on, and the RBA’s credibility survived. Arguably, the moves may even have enhanced the central bank’s standing. Few institutions are revered in Australian life like the RBA, probably reflecting that 28-year run. There’s little mileage in taking on Lowe in public, and Morrison would be ill-advised to attempt it.
The second risk relates to a series of rate cuts. Arguably the biggest chink in Australia’s domestic armor is the slide in home prices. The irony is everyone wanted the residential real-estate market to cool at least a bit. A few cuts from the RBA could breathe some life back into the sector. That would arrest the drop, but would it bring things back to the way they were?
An RBA research paper published in March found that low rates, with an assist from immigration, fuelled the surge in house prices and construction. (The paper was careful to note that low rates have been a global phenomenon.) As my Bloomberg News colleague Michael Heath has written, Sydney home prices climbed about 75 per cent in the five years through mid-2017, coinciding with central bank easing. More recently, Sydney prices are down by more than 10 per cent from their peak. Supply struggled to keep pace with demand, which meant that extra capacity hit the market just as prices came off the boil.
While a breather was welcome, the descent is probably too jarring for some. The unemployment rate is low at 5 per cent , but consumer spending isn’t firing.
The central bank has held interest rates at the current level since August 2016. Low inflation seems here to stay, so it’s a question of what you do about it. The RBA should consider the risks, then move anyway.