Wayne Cole

SYDNEY. (Reuters). Australia’s central banking is currently in a tight spot as it considers raising its interest rate for the first time since 2010. It will also be attempting to antagonise one major political party, as well as reexamining its policies in the past.

All it comes down to timing. It all comes down to timing. The Liberal-National government will face a tight election battle against Labor on May 21. At its May 3 meeting, the Reserve Bank of Australia has to decide whether it will hike rates from the emergency lows of 0.1% on June 7. After it receives more information on the economy and wages.

That all changed on Tuesday when inflation reached 20-year heights in the first three months of the year. Inflation soared past RBA’s target range of 2-3%.

The market surge was so alarming that it forced the pricing of the May hike at 0.25% to be pushed forward.

It is clear that there is a need for tightening, as consumer prices rose at a blistering 5.1% from March to March. This is well beyond any bearish forecast.

Bill Evans, Westpac Bank’s chief economist, stated that “on seeing that number now our thinking is that it precludes any ‘luxury” of waiting for more information on the labor market and that the RBA board would have to act on May 3,”.

A Reuters poll of 32 economists found that the RBA was expected to increase its cash rate. [AUCBIR=ECI]Next week, the RBA will increase interest rates by 15 basis points Thirteen of the 20 people who were asked if the RBA should raise interest rates prior to the election said yes.

According to opinion polls the most important concern of respondents is the rising cost of living. The government cut half the excise duties on petrol in fear of backlash and distributed a revised budget last month.

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Scott Morrison, Prime Minister, is running on a ticket that promotes sound economic governance. Labor claims the Conservative government loves to see real wage declines.

ELECTION ISSUE

An increase in rates during the current campaign will cause ruffles within the government. However, a delay to the rate increases could expose the RBA as someone who puts politics before good policy. It has consistently avoided this accusation.

Labor may question whether the RBA will wait to June before delivering bad news. Labor is likely to be more concerned about the expected rapid rises.

It is possible to change the rate during an election campaign. It was done by the RBA weeks prior to the 2007 election, which the Liberal-National government lost.

A further problem for the central bank lies in that the parties have made a commitment to review their past performances with an eye towards rectifying any perceived weaknesses.

The four largest banks in Australia are calling for an increase in rates next week. However, the fourth bank is not tipping June. This is because the RBA has stated that it prefers to have wage data on May 18th.

Felicity Emmett, senior economist at ANZ, stated that “the breadth of the CPI report strongly suggests it would be imprudent to wait for additional data on wages.”

“After all it’s inflation the RBA targets and not wages.”