How interest rates and inflation could affect the federal election in 2022

There’s one thing Prime Minister Scott Morrison has very little control over – and it’s probably the very thing that seals his fate.

For more than 25 years, the Coalition’s claims about its superior skills in economic management have been the key to the electoral fortunes of liberals and nationals.

During the Howard years of 1996 to 2007, a key part of this platform was that a Liberal government would offer low interest rates.

As the 1996 federal election approached, then Opposition Leader John Howard released the Coalition’s housing policy, which opened with the following phrase: “A Liberal and National Government operate a well-run economy and offer low interest rates. ”

Australians had seen their interest rates rise to over 17 percent by the end of the 1980s, so the promise of lower rates turned out to be part of a long-term recipe for the country’s electoral success. Liberal Party.

During the 2004 campaign, in particular, Howard placed great emphasis on the narrative of falling interest rates and once again played a role in the Coalition’s return to power.

But during the 2007 election campaign, interest rates proved to be a detriment to the Coalition’s political fortunes rather than the advantage they had previously been.

Then, just over two weeks before the nation went to the polls, the RBA raised interest rates during an election campaign for the first time in its history.

It was a blow to the Coalition, which was already lagging behind in the polls. In the days that followed, Howard spoke out on the matter at a press conference.

“I would say to borrowers in this country who are affected by this change, that I am sorry,” said Howard. “I regret the additional burden that will be placed on them as a result. “

Could history repeat itself?

As time is running out until a possible final federal election date of May 21, 2022, suddenly Prime Minister Scott Morrison could face the same challenge as John Howard – a rate hike during an election campaign .

Since the Coalition’s return to power in September 2013, interest rates have followed only one path: down.

When Tony Abbott defeated Kevin Rudd in the 2013 election, the RBA’s cash rate was 2.5%. Today it is 0.1 percent.

But if the interest rate futures markets are right, it may not be for very long.

Currently, interest rate futures provide for a full rate hike of 0.25% for the July RBA meeting, less than two months after the last possible election date of May 21.

It comes amid a rapidly changing interest rate story emanating from the global rate regulator, the US Federal Reserve. In the minutes of their December 14 and 15 political meeting, officials noted that it may become justified to raise interest rates sooner than expected.

Interest rate futures are now anticipating a more than 75 percent chance of a March rate hike by the Fed, including a 4.1 percent hike from a 0.5 percent hike. hundred.

After no hike in interest rates for more than 11 years, a rate hike may prove to be a shock to the electorate, especially given the remaining economic uncertainties resulting from the pandemic.

The impact on households

When the RBA hiked rates during the 2007 election campaign, the spot rate stood at 6.5 percent. So when the RBA raised its rates 0.25 percent, the impact was not particularly damaging or unusual.

Based on the standard variable rate at the time, interest charges only rose 3.2% for the average mortgage holder.

With rates much lower this time around, a 0.25% rate hike would result in an 8.25% increase in interest payments for the average household.

But there’s also the psychological impact of rising rates, especially for homebuyers who have recently staked everything on a mortgage to secure housing in today’s rapidly appreciating market.

Many recent buyers have been prompted to pull the trigger on a real estate transaction by the Reserve Bank’s continued insistence that rates not rise for at least three years.

If this turns out to be spectacularly wrong, as global inflationary pressures impact bank funding costs, some mortgage holders might find themselves quite shocked at the unexpected blow to their household budgets and perhaps even look someone to blame.

While the federal government is not responsible for monetary policy and interest rate setting, that has not stopped it from facing anger at rising rates in the past or promising that rates will would be lower under their leadership.

Go forward

Whether or not interest rates will rise will likely remain a matter of debate until the RBA finally pulls the trigger.

As the market anticipates an aggressive cycle of rate hikes of three 0.25% hikes by the end of the year, it has often been wrong about the direction of interest rates before.

Before the pandemic, Australia had already bet the farm on rising house prices and since then we have bet everything except the kitchen sink.

But if rates rose for the first time in more than a decade, even after repeated promises from the RBA, that they wouldn’t until at least 2024, who exactly will the anger be against?

In 2007, it was John Howard, as a hike in campaign rates made an already difficult battle even more difficult and contributed to one of the Coalition’s worst election defeats in recent memory.

Ultimately, there are a lot of ifs and buts that have to go a certain way for a May 2022 rate hike to happen, but if they do, it could make the battle of the coalition to win the elections even more difficult.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommenter

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