Pollies and interest rates: how low can they go?
The Australian Dream - the family home on a quarter acre block - has long been a political battleground.
Yet since handing responsibility for setting the official cash rate to the Reserve Bank in the 1990s, the capacity for governments of either stripe to do much at all has been routinely overstated.
For this, grandstanding politicians have no one to blame but themselves.
John Howard did more than most to demonstrate the powerlessness of governments with his election-winning theme in 2004: “Who do you trust to keep interest rates low?”. They trusted him in droves only to be proved wrong much later.
It worked at the time because it took voter anger at him over four hikes, and cleverly alchemised that into an even more powerful elemental force: fear of worse to come under the other mob. Brilliant!
But the trust he won soured with each of the next six increases, the last during the 2007 election campaign itself. Karma perhaps?
In office, Kevin Rudd too found he had no lever for driving rates down even if the economy was managed well. In fact, especially if it were managed well.
Such is the political irony of interest rates - they go up when the economy’s growing strongly (which is otherwise good) because they are the number one tool for fighting inflation (which is very bad). Voters now know this too.
In any event, Rudd’s interest rate honour was saved after a couple of embarrassing early hikes in 2008 by the looming GFC.
It is easy to forget how dramatic this was. In September 2008, the RBA first trimmed a tentative 25 basis points from its 7.25 per cent cash rate - the first cut in almost seven years.
It then became more aggressive, knocking in big chunks another 375 basis points off over the next four meetings. By April 2009, the official cash rate was down to its GFC nadir of 3.00 per cent.
For Rudd and Treasurer Wayne Swan however, there was little credit to be had for cheaper housing finance. Just a whole lot more fear.
Which brings us to this week’s surprise decision by the RBA which should be good news for borrowers and renters alike…
As Joe Hockey immediately said, with this latest 25 basis point cut, Australia’s 3.25 per cent rate is suddenly just one cut away from the record-low GFC setting - a mark since acknowledged by Mr Swan as an emergency rate as he tried to explain away rises on the way back out of the crisis.
For Mr Hockey though, it was a deft repackaging of good news for borrowers to fit the Opposition bad news critique of an economy in dire trouble.
Liberals prefer not to discuss John Howard’s other big claim from 2004 that rates would always be lower under the Coalition.
When pressed they argue that Howard was talking about the retail rate and not the cash rate etc. etc. It is rubbish on either count. This shilly-shallying demonstrates not only the centrality of interest rates to Australian politics but the tendency of politicians to be simple with solutions and yet nuanced and qualified when forced to explain their failures. Who knew?
Another Coalition favourite is the claim that Swan has no sway with the banks because they no longer pass on cash rate reductions despite his public posturing.
If it is true it was probably always true for it conveniently ignores six occasions between May 1997 and August 2000 when movements in the retail rates were smaller than the cash rate savings or where there were increases outside of RBA movements.
The cash rate may yet drift lower, perhaps down to 2.75 per cent especially if a prediction from the IMF’s chief economist Olivier Blanchard made yesterday is correct.
He told a conference in Hungary that sovereign debt problems in the Eurozone, the US and Japan coupled with a China slowdown would see global growth hobbled until 2018.
“It’s not yet a lost decade, but it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape,’’ he said.
Lower housing rates will continue to ease the hip-pocket pain for households but there’ll be no votes in it for governments – of either persuasion.
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