Interest rates and election dates

In the lead-up to the November 2007 federal election, there is little doubting that interest rates played a crucial role on shaping the attitudes of voters towards the Howard Government. With Howard, the poisonous element was his controversial promise to keep interest rates low. With Rudd, the poisonous element is the rather prolonged rollout of his government’s stimulus package – particularly the “Building the Education Revolution” (BER) component. Although the government probably has its political hands full with a few other things just at the moment, it would be surprising if it didn’t have one eye on the inflation outlook when deciding precisely when to call this year’s election.

As a result of the continuing financial instability in Europe and the recent flight of investors away from the Australian dollar, the RBA Board decided to leave the cash rate as is at this morning’s meeting, bucking the recent trend (three consecutive 0.25% increases in the last three months):

In Australia, with the high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Inflation appears likely to be in the upper half of the target zone over the next year.

Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago.

Despite the comment on inflation, it seems likely that with global financial instability still floating around in the short-term, the RBA is unlikely to be too adventurous on interest rates in the next few months. Could this be the carrot that Federal Labor decides to seize on and call a August election?

ELSEWHERE: Antony Green’s excellent analysis from January this year corroborates this thesis, suggesting that an August poll date is starting to look odds-on.