The Reserve Bank of Australia will take the biggest test of its political independence in almost two decades as economic factors have aligned for a rate hike today against the political factors due to the federal election.
The last time the Reserve Bank moved to raise its benchmark rate during an election was in 2007 when inflation hit 5 per cent.
According to the the Australian Bureau of Statistics (ABS), Australia’s annual inflation rate surged way above the Reserve Bank’s 2-3% target to 5.1% – the biggest annual inflation rate for two decades.
Consumer prices surged by 2.1 per cent during the March quarter alone.
Both figures beat the market expectations, leaving no doubts the rates must rise. Absolutely, no purely economic reason not raise the rates. The case for an immediate rate rise is rock solid, but can the RBA put politics aside and make a move today?
If the Reserve Bank fails to lift rates mid-election due the political challenges, it will risk having to go higher and harder in coming months.
Yes, political challenges should not be underestimated. The central bank raised interest rates during the run-up to the poll in 2007, helping to end then prime minister John Howard's 11 years in power.
However, despite the independent standing of the RBA, there has always been an unwritten rule not to
Despite its independent standing, the RBA is often believed to have an unwritten rule that prevents them from making rate decisions during an election campaign.
That is what makes today a true test of its independence. This independence was confirmed by the interest rate hike during the 2007 election campaign.
Now the timing of the higher than expected CPI, the federal election and the way stars have aligned in the economic and political landscape gives the Reserve Bank a historic opportunity to make a very important point about their independence from the Government of the day: do what is needed.
Alternatively, governor Philip Lowe can copy-paste last month's press release to pass the test of loyalty.
