Interest rates past and future

Last week ACNielsen reported on the public’s retrospective view of interest rates, finding that 49% of its respondents thought interest rates would have been the same had Labor won, 31% thought rates would have been higher, 7% lower, and 13% couldn’t say. Today’s Newspoll results report on a prospective question:

John Howard or Kevin Rudd – who do you think is most capable of keeping interest rates lower?

The wording is a bit odd, lower than what? But again the biggest single group are those who can’t or won’t choose, 39% (22% neither + 17% uncommitted), followed by Howard on 34% and Rudd on 27%. Clearly Rudd’s 27% is a big improvement for Labor on the 7% who couldn’t imagine Mark Latham keeping interest rates down, but notably less than half of people (48%) intending to vote Labor were prepared to back Rudd on this issue. There is no significant Ruddmania here; with interest rates lower than they are now Kim Beazley scored 23% in a Newspoll in June 2006 (though the question was different; asking which party would better handle interest rates). It looks like most of the people who previously backed the Coalition in Newspoll surveys are heading to the undecided column rather than to Labor.

Noting the bad results on the interest rate survey, a slip in Coalition support on the which party is better to handle the economy question, and a decline in the PM’s satisfaction levels, Dennis Shanahan concluded that ‘the latest interest rate rise appears to have dented the Coalition’s economic credentials’.

That’s a perfectly plausible interpretation of what the public is thinking, but it highlights the limits of voters’ economic reasoning. A monetary policy framework that lets interest rates go up during an election is one of the government’s achievements. And increasing interest rates can be – and are in this case – a symptom of good economic performance, with strong demand on an economy already nearing capacity putting upward pressure on prices. To predict that interest rates might go down under a party may (unintentionally) be a criticism, that slowing economic activity as a result of its policies will encourage the RBA to try to boost the economy with lower rates.

Still, this is a problem that is more than a little of of the government’s own making. They have emphasised interest rates as a proxy of economic performance and competence. Now rising interest rates are obscuring some very good results in other economic indicators.

5 thoughts on “Interest rates past and future

  1. I think your last point hits the nail on the head Andrew. Interest rates are seized upon becuase they’re an economic variable which has a short-term hip pocket impact on “ordinary mums and dads”.
    As an interesting comparison, in Paul Keating’s most recent Lateline interview, he peppered his explanation of economic concepts with down-to-earth imagery and vocab which gave you some sense of what was being communicated even if you didn’t understand the jargon. In contrast, John Howard’s tactic is basically “interest rates”, “jobs”, “prosperity”. He doesn’t often stop to explain or refine his message, and it seems to me and possibly the rest of the electorate like a stream of catchwords fed to him by his advisors.
    Perhaps it’s a treasurer vs. PM stylistic difference. How did Bob Hawke communicate his electoral pitch?


  2. Andrew,

    I’m no economist, but wouldn’t the answer to your point about ‘lower interest = poorer performing economy’ be that it is incumbent upon policy-makers to boost the supply-side? I mean, if the problem is that interest rates must rise because demand is pushing up against capacity, isn’t the real solution to up capacity, rather than manage demand down? Doesn’t Howard deserve the blame for not doing enough on that? I mean, we still have a capital gains tax and we still have a corporate income tax rate of 30%. This is why I think the ‘interest rates are high because we are so good’ line from Howard and Costello, while perhaps superficially and electorally palatable, deserves greater attention from the public. We have been caught a little short on business investment, no?



  3. Leon – Hawke was regarded as a good communicator, but his syntax could be quite tortured sometimes. I think it was more his general charisma that carried people than exactly what he was saying.

    BBB – Business investment has been pretty strong, but I agree that in general terms the federal government’s more important role is removing obstacles to increased supply rather than managing demand.


  4. I’m not convinced the Federal Government has been delinquent in failing to free up supply-side bottlenecks. Most physical infrastructure is under the control of State Governments or the private sector and I am doubtful that even in areas where the Feds have an influence, such as telecommunications, things are so bad. For example, would rolling out high-speed broadband to places like Dubbo make much difference to economic growth? Skilled labour is in short supply, but so is any labour. Moreover, virtually everyone has been surprised by the strength of the resources boom, so I am not sure one could fairly criticise the Feds for not spending on training schemes 5 years ago.


  5. Rajat – I would argue that some labour shortages are directly caused by federal policy, though mostly in the health sector. Fixing these would, of course, have only a very minor effect on economy-wide indicators.


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