Sunday, 5 February 2012

Politics and Interest Rates

Three or four months ago, the opinion polls had the two-party-preferred vote for the Coalition at around 57 or 58%, with Labor at around 42 or 43%.  In the last few weeks, the polls have moved around 4% with the Coalition down to around 53 to 54% with Labor up at around 46 or 47%. 

In almost all of the analysis of this not-insignificant move, one factor has been strangely ignored.

Interest rates.

The RBA surprised most by starting an interest rate cutting cycle in November.  It followed up with another rate cut in December and if the current market pricing is even vaguely correct, there will be a series of 3 or 4 more interest rate cuts through 2012.

It is no surprise that the turning point in the polls occurred at around the time of the first interest rate cut.  It is obviously an important cost of living issue.  While many factors influence voter’s whims and preferences, interest rates are important.

Just look at the demise of the Howard government in 2007.  While many factors contributed to the change of government and Prime Minister Howard’s humiliating loss of his own seat, interest rates were no doubt one factor – including in Bennelong.

Some still wonder how the Howard Government could be beaten so badly with the economy strong, unemployment near 4.5%, the Budget in substantial surplus and tax cuts and spending being thrown around with gay abandon.

Interest rates were a factor.

Recall at that time, the RBA had been hiking interest rates progressively into the lead in to the November 2007 election and it was so worried about the inflation outlook, that it hiked during the election campaign.  That hike took mortgage rates to a wallet-squeezing 8.6%.

Some 15 years after interest rates hit 17% under the Labor government, the Coalition used to tag Labor as the Party of high interest rates.  Whatever the facts, it was effective politics and hurt Labor for years.

On this issue, the Gillard Government is economically and politically smart at the moment, doing whatever it can to keep downwards pressure on inflation and with that, downward pressure on interest rates.  That’s why the commitment to a budget surplus in 2012-13 is not only good economics but it is good politics.

If it can keep a tight grip on government spending and stick more or less to the numbers in the MYEFO, government demand will be cutting away at GDP, cutting away at inflation, freeing up capacity in the economy and giving a degree of freedom to the RBA to cut rates.  Ideally, it would trim a few billion extra off outlays, but that's another issue.

Spending Ministers would be wise to consider this in the lead into the Budget in May.

If the Government can stick to its guns on economic policy and the RBA delivers a few more interest rate cuts over the next year or so, a powerful mix of good economic management - “we delivered a surplus and there are more to come” - and lower interest rates will be electorally popular.  

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