Politically charged RBA meeting set to put campaign focus on economy

Shorten was the first to get quizzed after the March quarter showed inflation at zero through the previous three months.

"If there's no inflation in this quarter, that tells you this is an economy running on empty," he said.

The Opposition Leader quickly linked the report to wages growth, household spending and to the forecasts for inflation (and the wider economy) contained in the budget which was released just four weeks ago.

"What it shows me is that people are closing their wallets and purses because they are spending household savings just to make ends meet," he noted.

An hour or so later, Morrison gave a different interpretation of the figures.

He focused on electricity prices (which fell during the quarter), had a whack at Shorten and then turned his attention to the jobs market.

"The most recent employment figures were also very strong, particularly for full-time jobs growth. So you know, the economy is a mixture of these figures," he said.

The Prime Minister also went dangerously close to arguing low inflation is actually good for real wage growth but pulled up before making what would have been a political faux pas.

In a nut shell, both men covered the arguments that the Reserve Bank board is set to have in a week's time when it considers official interest rate settings.

Either inflation is as dead as a Monty Python parrot, a bad sign for the broader economy, or the better measure for Australia is an employment market that continues to outperform.

Budget figures released by the Finance Department the day before the inflation report also pointed to the same tension.

Personal income tax revenue was $1.4 billion better than the department had predicted in December, a sure sign the strong jobs market is providing extra cash to Canberra.

But the same figures also showed GST collections $1.4 billion lower than had been forecast at the mid-year budget update. Other consumer-led tax collections, including wine equalisation and the impost on luxury cars, were also short of predictions.

This is pointing to the softness retailers have been complaining about for ages which is also connected to the sluggish growth in wages that workers have been enduring for several years.

There were other similar contradictions.

Company tax, which had until recently been racing ahead of expectations, is now slightly behind where the Finance Department had forecast it to sit. But superannuation taxes are way ahead off the back of a sharemarket that rallied last week on investor belief the Reserve Bank is about to cut interest rates.

Ahead of the inflation report, markets put the chance of a May 7 rate cut at about one in 10.

It now puts the odds at no better than a coin toss.

Politically, a rate change during an election campaign - especially one just 11 days out from polling day - is a huge deal.

The resentment within the Liberal Party about the move by the RBA under Glenn Stevens to lift rates late in the 2007 campaign has not yet disappeared. (Paul Keating was similarly displeased with the RBA back under Bernie Fraser when it lifted rates in 1994.)

A rate cut would be a signal the Reserve has doubts about the economy. No matter how you spin it, that's not a positive for the party in power.

If the bank leaves rates on hold, questions could be asked about whether the board did not want to become embroiled in a political bun fight.

Those questions would go past 11 on the Spinal Tap volume measure if the bank materially changes its longer-term forecasts due to be released the Friday after next week's meeting.

Those forecasts are going to be knocked down, particularly around the key measures of underlying inflation, while there's every chance the bank will have to revisit its expectations on overall economic growth and perhaps even wages.

Holding rates steady for an extra month, and then admitting a deterioration of the economy just a few days later, would make little sense (markets have fully priced in a rate cut by July).

Through the first two-and-a-half weeks of the election campaign the economy and its performance have barely rated a mention as the major parties, in their own hermetically sealed worlds, battle over long-term promises.

But next week's Reserve Bank board meeting, the most politically charged since that one back in 2007, is likely to change that state of affairs.