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.

More interest rates gubbish in the media

With an interest rate cut all but announced for tomorrow, I have been bemused to observe the public debate on interest rates once again focus on a red herring. Treasurer Wayne Swan has taken the brave and perhaps politically unusual step of declining to demand that Australia’s banks pass on the hypothetical interest rate cut to consumers. Shadow Treasurer Julie Bishop has taken precisely the opposite tack, criticising the government for not demanding that the banks pass on the cuts:

Reserve Bank governor Glenn Stevens has reportedly told Prime Minister Kevin Rudd that squeezing the banks too hard could make it unprofitable for them to lend and push the Australian economy into recession.However, opposition treasury spokeswoman Julie Bishop said passing on the full RBA cut would help keep people in jobs and the Australian banking sector stay strong.

“One of the most important ways to keep our financial sector strong is to ensure that Australians keep their jobs so that they can pay off their mortgages … their bank loans,” she told reporters in Perth.”

And that is why if there is an interest rate cut tomorrow it should be passed on in full so that people can keep their jobs and keep paying off their financial obligations.”

This debate raises some interesting questions about what Commonwealth Treasurers should and shouldn’t do, or perhaps more interestingly, what they realistically have the influence to do. Should Wayne Swan really be getting on the blower, as Julie Bishop seems to be suggesting, to the chiefs of the big five tomorrow and demanding that they immediately pass on the hypothetical cut to consumers? Does Julie Bishop, a so-called economic rationalist, have so little faith in the market that she feels the Treasurer needs to instruct individual private organisations on how they run their business? Put simply, it is an absurdity.

There are three points worth making here in rebuttal to Bishop’s foolishly populist demands:

1) It is not the Commonwealth Treasurer’s role to attempt to run the business of Australia’s big five banks by demanding that certain monetary policy actions be taken;

2) The Treasurer’s views are probably the least of the concerns of Australia’s big five. They are businesses answering to their customers and shareholders, not the fiefdoms of the Treasurer. here Any views that Treasurer Swan attempted to impose upon them would almost certainly be ignored;

3) It is almost a certainty that one of the big five will elect (if not immediately, than in the relatively short-term) to cut rates and seek to make their offerings more attractive to consumers. When this happens, there is a pretty good likelihood that the others will follow suit in due course.

This is not a good start from Bishop. One wonders whether the Turnbull Opposition is going to suffer for not having someone who can reliably score the odd point (e.g. the Opposition Leader!) against Swan opposing him in the Shadow Treasury.