Chance of another rate cut grows FINANCIAL markets are pointing to the possibility of a rate cut in August, just days before the federal election officially gets under way. It wasn't too long ago the Reserve Bank of Australia (RBA) would go out of its way to avoid changing rates during an election campaign for fear of showing a political bias. At least that was the perception in financial markets. That was, of course, until the November 2007 election when the RBA lifted rates smack bang in the middle of the campaign. But its action wasn't totally out of the blue. RBA governor Glenn Stevens bluntly told a hearing of the House of Representatives economics committee just months earlier that if rates had to rise during the 2007 election campaign, they would. "If it's clear that something needs to be done, I don't know what explanation we can offer to the Australian public for not doing it," Mr Stevens had said. It's questionable what impact that November 2007 rate hike had on the election outcome. Rates had already risen nine times in that cycle, while opinion polls had for some time indicated that 11 years of coalition government was coming to end. Similarly, even if the RBA does cut in July, August, or even in September during the election campaign itself, it would seem unlikely that it would alter the outcome with just under 100 days to go. Labor's standing in this week's Newspoll dropped two points to 42 per cent on a two-party preferred basis, while the coalition rose to 58 per cent, which would produce a landslide if repeated in the September 14 election. The prospect of a rate cut begs the question whether another one would have borrowers punching the air with joy, or have them deeply concerned that the economy was in real trouble. The cash rate already stands at an all-time low of 2.75 per cent. Stevens and his board are trying to help the economy cope with a gradual shift from a mining boom to a broader expansion. The central bank left the cash rate unchanged this week as widely expected, after cutting from three per cent in May. Stevens said economic growth over the past year has been a bit below trend, and that is likely to remain the case in the near term. Trend growth is usually around 3.25 per cent. "The board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand," Stevens said. Markets priced in a greater risk of a rate cut in August as this would follow the next set of official inflation data in late June. The national accounts showed the economy grew at a modest pace of 0.6 per cent in the March quarter, dragging the annual rate down to 2.5 per cent from 3.1 per cent in December. Top officials at Treasury were aghast as to how the national accounts were being viewed. The fact that the growth was all in exports was not a problem, and neither was the economy on the brink of a recession, they said. The national accounts also showed that demand in Western Australia, a previous key driver of growth because of its obvious links to mining, had contracted for two consecutive quarters. Two negative quarters of gross domestic product (GDP) are deemed to be a recession by many economists, although there are other gauges, such as whether the annual rate is negative or not, and the speed at which unemployment rises. But according to Treasury executive director for its macroeconomics group, David Gruen, recessions are assessed on output, not demand. "The idea that in the face of the largest investment boom we have ever seen, you ignore exports and focus on the piece of the economy that is demand by Western Australia and claim that that is a recession belongs in the comic books," he told a Senate estimates hearing. Treasury secretary Martin Parkinson was equally condemning, saying that some of the hysteria surrounding the interpretation of the national accounts was "really over the top." Dr Parkinson says the significant cuts in the cash rate over the past 18 months or so are beginning to work, and helping to support the transition away from mining investment. "It was always a question of would this be a smooth transition, and the conclusion is it probably wouldn't," said Dr Parkinson.