Labor Poised for Rate Cut to End Poll Stalemate

Treasurer Jim Chalmers has been advising colleagues for the past six months to ignore interest rates and instead focus on economic factors over which the government has some influence.

He calls these "the trifecta": inflation, real wages, and unemployment.

Regarding interest rates, solely the responsibility of the Reserve Bank of Australia, Chalmers warned that there was little to be gained by chasing the bouncing ball of expectations.

He began giving the advice around the time inflation became more stubborn than expected, and the chance of a pre-election rate decrease faded.

This was a far cry from the beginning of last year when markets were confident of an interest rate cut in August and most likely another in September.

Indeed, Chalmers had entered his 2023-24 Christmas break with the expectation that the administration would have a "compelling economic story" to share at the following election. That didn't only apply to interest rates, but that was the hope.

Labor has raised interest rates 12 times, the most recent in November 2023. Anthony Albanese frequently marvels at Labor's ability to remain competitive in polls despite a once-in-a-generation inflation increase.

Chalmers' optimism, which seemed unwarranted only a few months ago, may now be vindicated.

Governments are held responsible for everything that happens while they are in power. This allows them to claim the good news as well.

Albanese and Chalmers were more optimistic on Wednesday than they had been in months, as data for the December quarter showed underlying inflation declined from 3.6% to 3.2%, somewhat lower than expected, raising the prospect of at least one rate cut before the election.

Both were careful not to skitter. Just because inflation is reducing does not mean prices are falling, and the worst thing they can do is go around announcing how terrific things are.

However, if the RBA lowers interest rates at its next meeting on February 18, it will undoubtedly boost Labor's prospects. It will indicate to a weary electorate that the worm has turned. This is Labor's last chance to break the election impasse.

One expects Albanese and his brain trust may postpone the ultimate choice on an election date until then. If the RBA does move on February 18, it would be prudent to cancel preparations for a March 25 budget and call an election for April 12, the earliest possible date if the Prime Minister does not wish to interfere with the March 8 West Australian election.

The RBA meets again on April 1. If the planets align, two rate decreases could occur before the April 12 election.

Otherwise, a budget followed by the last conceivable election date, May 17, remains the Hail Mary option. The government is going through the motions of crafting the budget, but it does not sound convincing about its commitment.

Chalmers announced on Wednesday that expectations of a much-reduced deficit this year, even a third consecutive surplus, have dissipated, and the deficit will be in line with the $29 billion anticipated in December.

A better narrative is about attaining the gentle landing he has long advocated for, of reaching a position when inflation is under control, interest rates are falling, unemployment is low, and wages are increasing. A quadrella, even.