As the Reserve Bank of Australia (RBA) prepares to hold its monthly meeting on interest rates next Tuesday, an air of uncertainty hangs over the proceedings. While the central bank is widely expected to keep the cash rate steady at 4.35%, its carefully calibrated economic models and forecasts risk being thrown into disarray by an event happening half a world away – the US presidential election.
The first polls in the hotly contested race between Democratic candidate Kamala Harris and former president Donald Trump will open mere hours after the RBA board wraps up its deliberations. And with tensions running high amid fears of delayed vote counts and potential unrest, the outcome of the election – and its impact on the global economy – is anyone’s guess.
Inflation Eases, But Services Prices “Sticky”
On the domestic front, the RBA will have some cause for optimism going into its meeting. The latest Consumer Price Index figures, released on Wednesday, showed annual inflation easing to 2.8% in the September quarter – the first time it has fallen within the bank’s 2-3% target range since early 2021.
Underlying inflation, which strips out volatile items, also retreated to 3.5% – in line with the RBA’s year-end forecasts. However, the price of services continued to creep upwards to an annual pace of 4.6%, which is likely to prompt RBA governor Michele Bullock to reiterate concerns about “sticky” inflation in certain sectors.
All Eyes on the US
But even as the RBA pores over the latest facts and figures, the specter of the US election looms large. Markets are already trying to price in the potential impact of a Harris or Trump victory, with vastly different implications for trade, immigration, and the independence of the US Federal Reserve.
A Harris win is likely to see a great degree of policy continuity regarding trade (and, more broadly, industrial policy), immigration and Federal Reserve independence. A Trump presidency in contrast would pursue substantially different policy in these areas.
Tony Kelly, NAB senior economist
Trump, for instance, has vowed to slap a 60% tariff on many imports if reelected – a move that would send shockwaves through the global trading system. The RBA will undoubtedly be war-gaming such scenarios, even if its public deliberations stay focused on more prosaic matters like the outlook for wages and consumer spending.
Hoping for a Smooth Outcome
In an ideal world, the US election would be settled quickly and decisively, allowing the RBA and other global economic actors to get back to business as usual. But with fears of a contested result growing by the day, such a smooth outcome is looking increasingly unlikely.
Instead, the RBA may find its finely tuned economic models and projections upended by forces beyond its control – from legal battles to civil unrest and everything in between. It’s a reminder of the old adage that “the best-laid plans of mice and men often go awry.”
As central bankers steeped in data and forecasting, the RBA’s leaders are used to dealing with uncertainty. But the sheer unpredictability of the US election presents a challenge of a different order – one that could make Tuesday’s rate decision seem quaint in hindsight.
All the RBA can do is make its decision based on the information at hand, and hope that the coming storm in the US doesn’t throw its careful calculations too far off course. But in a world where the improbable has become almost routine, nothing can be taken for granted – not even the best-laid plans of the nation’s top economic minds.
In an ideal world, the US election would be settled quickly and decisively, allowing the RBA and other global economic actors to get back to business as usual. But with fears of a contested result growing by the day, such a smooth outcome is looking increasingly unlikely.
Instead, the RBA may find its finely tuned economic models and projections upended by forces beyond its control – from legal battles to civil unrest and everything in between. It’s a reminder of the old adage that “the best-laid plans of mice and men often go awry.”
As central bankers steeped in data and forecasting, the RBA’s leaders are used to dealing with uncertainty. But the sheer unpredictability of the US election presents a challenge of a different order – one that could make Tuesday’s rate decision seem quaint in hindsight.
All the RBA can do is make its decision based on the information at hand, and hope that the coming storm in the US doesn’t throw its careful calculations too far off course. But in a world where the improbable has become almost routine, nothing can be taken for granted – not even the best-laid plans of the nation’s top economic minds.
