Where Can the Reserve Bank Hide?

With less than three weeks to go, the federal election is about to get a whole lot messier.

Behind closed doors, party apparatchiks are rolling up their sleeves. Doing deals; organising preferences. We can now ready ourselves for a barrage of US-style mud-slinging.

The strategists are bunkered down deep in their party’s HQ. Every minute of their leader’s movements carefully planned.

Inside the bunkers, there are maps filled with red pins. A trip to Townsville, and then over to the west, before flying back to a marginal seat in Adelaide.

On the ground, fixers run ahead of their candidate to make sure no ambush lies in waiting. No pesky shopkeeper ready to unload their anger. Nor, a persistent journalist insisting on an answer to a sticky question.

Good luck to you if you live in a marginal seat. Get ready for a bucketload of manna to fall from the heavens.

While the nutters and one-policy parties slug it out on the periphery, the two major parties will go to battle where it matters. That is, in the middle.

And no issue dominates the middle ground like the cost of living. As we read nearly every day, wage growth has stalled. Meanwhile, bills only seem to be rising.

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Turning theory on its head

Inflation should pick up naturally as a by-product of a growing economy. Well, that’s what the theory tells us, anyway.

As you get closer to full employment, pressure on wages normally goes in one direction…up. If someone believes their salary is too low, they can seek a higher wage elsewhere.

Yet, while Australia has enjoyed 28 years of economic growth — a world record according to Austrade — inflation is anemic. In the March quarter, inflation came in at exactly zero.

For the full 12 months, inflation was 1.3% — well below the RBA’s target band of 2–3%. Maybe like other central banks, the RBA’s target band might now be set too high.

Trying to manufacture inflation, though, is a bit like trying to create wage growth. There isn’t any manual that shows you how. There are just too many variables.

Plus, the two are related. Any increase in wages flows through into inflation. And that means any wage rise can hurt those it is supposed to help, as the cost of goods and services also rise.

But that won’t stop the claims and counter claims in the election. Back and forth the arguments will go, about which side believes they can grow wages.

Wage growth, however, is just one way to put more money into the punters’ pockets. There are other ways…like tax cuts and lower interest rates.

You can bet on a tax cut whichever side wins the election. That we already know. However, interest rates are out of the government’s hands.

While interest rate cuts help mortgage holders, they also lower the cost of credit in the wider economy. And that can help stimulate demand…and leader to lower unemployment.

The Reserve Bank is a reluctant player

Although it much prefers to be out of the spotlight, the Reserve Bank might once again find itself a player in this election. As I say, a reluctant one.

Who can forget the RBA hiking rates in the middle of the 2007 election campaign, and all the brouhaha that followed?

With the RBA increasing rates to 6.75% just weeks before the election, then Prime Minister John Howard publicly apologised for the ‘additional burden’ (although outside his control) it would place on borrowers.

Last week’s inflation number, however, might just force the RBA’s hand. This time, though, the cards might fall the other way in the form of a cut.

The RBA is due to meet less than two weeks out from the election. That is, two weeks from today (30 April). You can bet any cut will become highly politicised.

For those relying on their savings and investments to supplement their income, any rate cut will be another kick in the guts.

But for those with a mortgage, of course, any interest rate cut will be more than welcome. It will put more money back into their pocket — even without a pay rise.

With the Royal Commission still fresh in people’s minds, it will be an extremely brave bank boss who does not pass any rate cut on in full.

All the best,

Matt Hibbard,
Editor, Options Trader

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Matt Hibbard is Money Morning’s income specialist. With nearly three decades in the markets, Matt has traded just about every asset class there is. The one thing that has stuck with him over this time is a very simple premise. That is, it’s the cash a company generates that ultimately determines its value. Sure, some stocks might fly away to multi-digit gains. But unless these companies can convert the ‘story’ into real money, the market will eventually find them out. And when that happens, the share price quickly falls back to Earth. Matt is also the editor of Options Trader, where he shows subscribers how to use basic options strategies to generate income. This is income they can generate on top of regular dividend payments. Matt doesn’t play the prediction game, where the aim is to be proven ‘right’. Instead, his goal is to generate as much income as he can for his subscribers, irrespective of whether the market is going up or down.


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