The governor’s first speech of the year enabled him to reset the RBA’s official view of the economy, which had diverged from reality over the past two months.
Tumbling business confidence and conditions, the acceleration in price falls for the Sydney and Melbourne property markets (and falls across almost every other capital), continuing softness in the retail sector, subdued inflation and evidence of weak growth gave Dr Lowe no alternative but to change tack on rates.
Markets had already moved to that point. Ahead of his speech, they had a rate cut at a better than 50-50 chance. They now are betting rates will be at 1.25 per cent by the middle of 2020.
While the government is keen to talk up the economy at every turn, the RBA has been forced into a more sober acknowledgement that things are not all that beer and skittles.
When John Howard said interest rates would always be lower under a Coalition government during the 2004 election campaign, the accepted norm was that a drop in interest rates was a political positive.
More than a decade and one Global Financial Crisis later, the accepted norm is that low rates are a political negative because they are evidence of an economy’s underlying problems.
The first meeting at which the Reserve Bank board could realistically consider a rate cut will be its meeting on May 7. The March quarter inflation data will have been released a fortnight earlier, giving the bank a clear view on CPI pressures.
Job figures, which Dr Lowe has highlighted as a key factor in the bank’s approach to rate settings, are also out in mid-April.
May 7 will also be either the last or second last Tuesday before a federal election.
Rate changes have occurred in an election campaign before but they are unusual. In 2013 a cut failed to help Kevin Rudd, while one that occurred in 2001 was in response to the September 11 terror attacks.
Most famously, Howard’s fate was sealed when the RBA increased rates just ahead of the 2007 election (and then lifted them twice more in the first half of Rudd’s first year as prime minister).
A Reserve Bank governor explaining why rates need to be cut just ahead of an election that will be fought, in part, on the management of the economy would not be on Morrison’s wish list.
But it may be his political reality.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.