Why the Reserve Bank is about to do something relatively rare

The Reserve Bank is probably about to do something that it doesn't often - hike interest rates during the final stages of an election campaign.Economists expect the official cash rate to be increased by 25 basis points as the central bank leans against inflation being pushed up by higher fuel prices.Commentators have often said that the Reserve Bank might avoid making a change close to the election, although it has no requirement to include any political consideration in its decision-making.Infometrics chief forecaster Gareth Kiernan said the most recent time it had made a change during an election campaign was in July 2014, when it raised the rate by 25 basis points ahead of a 20 September election.In 2008, it cut the rate by 100 basis points a matter of weeks before the election.In 2002, it raised the rate by 25 basis points weeks before a July election and in 1999 it raised the rate by 50 basis points 10 days before the November election."I guess the difference between this time and previous occasions is that none of the elections have been close, so it was unlikely that interest rate changes would affect the result materially, whereas this time it's not at all clear what the election outcome might be," Kiernan said.But he said the Reserve Bank was independent and needed to do its job of keeping inflation under control rather than worrying whether people would think its actions reflected the government's performance."If the government had been pursuing aggressively stimulatory monetary policy, then it would be more correct to draw a link between the government and the Reserve Bank's actions, but that is not the case this time. So I think most people will understand that any interest rate rise is a reflection of broader economic conditions than the government … Although National's eagerness to talk up their management and economic outcomes last year, and willingness to take credit for the interest rate cuts that had previously occurred, might make it harder for voters not to make some association between the government, the middling economic outcomes, and current interest rate rises."Kelly Eckhold, chief economist at Westpac, said governments would always prefer interest rates were not rising."I think that's probably self-evident. Although I think every survey of what people seem to care about right now puts the cost of living right at the top of concerns beyond everything else."So I would have thought that it's probably not as big an issue compared to that, for example."He said the need to tighten rates had been well signalled."I guess the Reserve Bank is weighing up the sort of the economy versus the cost of living in terms of what it's doing."It is probably relevant to note that we have actually had growth in the last year at 2.6 percent … which was actually probably an above trend growth rate for New Zealand. The challenge, I think, for people's perceptions is that the growth is coming from areas that don't necessarily touch them directly, unless you're involved in the tourism or perhaps in the centres that are more dominated by the agriculture sector. So hence you get this dissonance, I think, between people wondering why interest rates are going up when they don't think the economy is growing when in fact it is."Political commentator Ben Thomas said he thought the impact on voters would be limited. "I don't know how many voters are going for National or ACT because they genuinely believe the cost of living is under control."Simplicity chief economist Shamubeel Eaqub said most people's mortgages were fixed, so they would not see rates rise immediately anyway."But the signal is mixed - interest rates are higher because the Reserve Bank reckons inflation is too high and economy is too strong. I obviously disagree with the Reserve Bank - but the signal to voters I think is pretty marginal. It is saying that the Reserve Bank is trying to control medium term inflation pressures. Many people will feel that the economy is not that strong and inflation is making them poorer."Otago University economist Murat Ungor said the governor had made it clear that the Reserve Bank would act in the run-up to the election if the inflation outlook required it."In practice, the election matters more for communication than for the decision itself. A move that markets have already priced in is far less politically charged than a surprise, so the bank's task is to signal clearly and then act on the data. Delaying a warranted increase because of the election calendar would itself be the more political choice, and it would risk a larger adjustment later."Sign up for Money with Susan Edmunds, a weekly newsletter covering all the things that affect how we make, spend and invest money.