Are interest rates a vote changer?

Labor and the commentariat are very excited about interest rates – what with a broken promise to keep them low and the possibility of rates going up during a campaign. But as with household finances generally, do the voters have a sense of perspective that the political class lacks?

Back in August, Andrew Leigh wrote an op-ed suggesting that interest rates did not affect the 2004 election in the way conventional wisdom presumes. Today’s Newspoll suggests that the 2007 election may be similar.

In a question asking whether the respondent would be less likely to vote for the Coalition if interest rates went up, only 9% said it would. That was largely driven by people who had already said they were going to vote Labor. Only 2% of those indicating support for the Liberals said that they would be less likely to vote Liberal if rates went up. But 4% of Coalition supporters said that they would be more likely to vote for the Coalition, as did 2% of Labor voters.

Assuming those respondents knew what they were saying, their answers highlight a point usually neglected in interest rate discussions. That is that people without mortgages but with savings benefit from higher interest rates. That would include a lot of people who usually vote for the Coalition, such as the ‘self-funded’ retirees.

While some households with mortgages will struggle if rates go up again, the proportions suffering ‘mortgage stress’ are greatly exaggerated. Most people would have borrowed understanding that rates would go up and down over a 25 year timeframe.

And for the Coalition, the upside of people giving them less credit for economic good news may be that they get less blame for economic bad news.

We’ll see how the polls react when, as is expected, the RBA puts up rates early next month. But I anticipate that, like many of the other turning points predicted by the commentariat, it will produce no significant or lasting change in the two-party preferred.

6 thoughts on “Are interest rates a vote changer?

  1. Your analysis leaves out those that currently have savings, no mortgage, but are considering getting one.

    As a personal anecdote: As someone without a mortgage but savings during the “recession” we had to have – I benefited greatly, so doesn’t that also apply to others when Labor was last in power.

    We can then also presume that those voters would more likely to vote Labor by 4% of Labor voters and 2% of Coalition voters. (assumption not fact)

    Admittedly its an anecdote, but assuming it applies it would negate the entire analysis. Wouldn’t it? I am by no means implying that it does.


  2. Looking at the AES data interest rates featured heavily for those individuals who were considering changing their vote during the campaign. So the ‘5 broken promises’ campaign the ALP is running should bite.


  3. Vee, as best I can recall, psychologists have discovered that people fear losses more than they value gains.

    This would translate into those with mortgages being more affected by, and therefore more responsive to, interest rate movements, than those with savings.


  4. Andrew, do you have an alternate hypothesis for why the Coalition vote appeared to increase during the course of the 2004 campaign? Wasn’t Latham ahead before the election was called? Was it just people starting to focus?


  5. Up until the mid-90s, the household sector as a whole was a net lender, so higher interest rates actually benefited aggregate household sector income. I think this is why interest rates don’t perform well in the econometric models of the 2PP vote.


  6. Steve:

    It doesn’t really matter who is holding the debt. If we’re running a current account defict it means by defintion that someone somehwere is not saving but actually borrowing.

    Your example if true ignores the heavy debt of the public and private sector a the time that would mean they would be adversely affected by higher interest rates.


    If your theory is so right you may want to explainn why “high” interest rate levels in Japan caused that economy to go to the floor and only stabilized after the introduction of ZIRP .. zero interest rate policy. The household sector in Japan was savings rich and they have a C?A surplus.


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