With Election Looming, RBA Removes Itself From a Tight Contest

  • Central bank omitted policy guidance when holding rate Tuesday
  • Election race sees government and opposition neck-and-neck

The Reserve Bank of Australia has distanced itself from a tightening election race by opting for inscrutability, in a move that also gives policy makers time to weigh stronger growth against record-low inflation.

Surprising markets by withholding forward guidance in an otherwise unsurprising no-change decision, Governor Glenn Stevens on Tuesday referred obliquely to “particular event risks.” These could span Britain’s June 23 vote on whether to stay in the European Union to Australia’s July 2 election to the Federal Reserve’s next move. At the same time, he reiterated that inflation -- which prompted a cut last month -- was likely to remain “quite low,” while noting areas of domestic demand had expanded “at or above trend.”

The statement was “an effort to sideline themselves until there is more visibility” on inflation, said Tim Toohey, chief economist for Australia at Goldman Sachs Group Inc. “Strategically, this also has the advantage of allowing the RBA to remove itself as a potential distraction during the remainder of the federal election campaign.”

Australia is half-way through a hard-fought election race as Prime Minister Malcolm Turnbull’s popularity slides and opposition leader Bill Shorten lifts his game, putting their parties neck-and-neck in a June 6 poll. The central bank would be keen to avoid showing its hand on the need for more stimulus via easing, with both sides likely to try to manipulate its views: the next rate meeting falls three days after the national vote.

In a relatively old-style right-left political divide, the government is pledging corporate tax cuts over 10 years to boost growth, while the Labor opposition is promising increased spending on education, skills and infrastructure. Neither party can fully fund its promises in a fiscal environment of persistent budget deficits.

Aside from the vote, the central bank is also closely watching the housing market following last month’s rate cut. Prices jumped 3.1 percent in Sydney in May, and 1.6 percent in Melbourne.

Labor wants to limit a popular tax law that gives a break to people who buy homes to rent them, pledging to scrap it for existing properties, which accounted for 93 percent of property investment last year. The party says the step would spur home building and allow more first-time buyers to enter the market; Turnbull warns that such moves would send prices tumbling, and has pledged to keep the current system.

In a country where the central bank’s benchmark rate serves as a reference for the vast majority of homeowners’ residential mortgage payments, all of this argued for the RBA to stay clear of the campaign.

Another Cut?

Just over three weeks after the election, Australia’s second-quarter inflation reading is due. Most commentary from economists following Tuesday’s decision to leave rates at a record-low 1.75 percent was that the July 27 consumer-price report will show further weakness, and prompt the RBA to cut at its August meeting.

Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada, was the sole economist predicting a cut this week. She maintained that there was a “reasonably compelling” case given the RBA’s own forecasts imply a lengthy period before inflation returns to target. In addition, she noted that wage and price signals since the May meeting “have been universally weak.”

At the other end of the scale is Alan Oster, National Australia Bank Ltd.’s chief economist and a former Treasury official, who predicts that rates will remain unchanged “in the immediate future.” He said “the big sleeper” from Stevens’s comments was on domestic demand being at or above trend, noting “it has been some time since the bank made such an assessment.”

Traders have pushed back rate-cut bets, pricing in a 42 percent chance of a reduction in August, down from 50 percent on Monday, with a 60 percent chance of an easing in November -- when the first RBA meeting after third-quarter inflation data will be held.

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