The theory that the Albanese Government needs to implement interest rate cuts before the next election is more of a gamble than pundits think, writes Stephen Koukoulas.
THERE IS A growing and frankly overpopulated bandwagon of soothsayers and “analysts” who reckon that the Federal Labor Government needs the Reserve Bank of Australia (RBA) to cut interest rates between now and the next election, due by May 2025, to win.
It’s “the vibe”.
This monetary policy mantra has intuitive appeal — low interest rates will make those voters with a mortgage and small business debt better off financially which should make them more inclined to vote for the incumbent.
Maybe.
What does history tell us?
Looking at the last ten federal elections in Australia since 1996, this theory has little substance.
In simple terms, election results over the past three decades reveal there is no obvious or consistent link between changes in interest rates prior to the election and the election result for the incumbent. Sometimes interest rate changes appear to matter, other times they don’t and other times the opposite result pans out. Interest rate cuts prior to an election sometimes see the incumbent lose and vice versa.
In the ten elections since 1996, there have been four changes in government while the incumbent has been re-elected six times.
What happened to interest rates before each of those ten elections?
Interest rate changes three months before polling day
In those ten elections, in the three months prior to polling day, the RBA has adjusted interest rates on five occasions — half the time in other words. The RBA delivered two interest rate cuts and three interest rate hikes with five no changes.
In the two rate-cutting examples in 2001 and 2013, the incumbent won once and lost once.
In the three rate hiking examples – 2007, 2010 and 2022 – the incumbent lost twice and won once.
In the five “no change” in interest rates examples, the incumbent won four times and lost just once.
This means that compared to the conventional wisdom that rate cuts close to election day help incumbents and hikes hurt them, it is only a 3-to-2 score in favour of that proposition, but it must be noted that the sample size is too small to be conclusive. For no change in interest rates, incumbents have a stronger tendency to win.
Interest rate changes one year before polling day
In the ten elections, in the year prior to polling day, the RBA has adjusted interest rates on seven occasions. There were three rate-cut episodes and four rate-hike episodes, with three no changes.
In the three interest rate-cutting examples a year before polling day – in 2001, 2013 and 2016 – the incumbent won two and lost one election.
In the four rate hiking examples in 2004, 2007, 2010 and 2022, the incumbent lost two and won two.
In the three “no change” events, the incumbent won two and lost one.
This means that compared with conventional wisdom and using a one-year time horizon, it is 4-to-3 in favour of the proposition which, like the three-month example, is not convincing.
The 2025 Election
The last change in interest rates in Australia was a rate hike, but that was over 13 months ago, in November 2023.
Despite chronic economic weakness, well-contained inflation, falling wage growth, rising unemployment and worldwide interest rate cuts, the RBA is reluctant to reduce interest rates until inflation is even lower and unemployment is higher.
Recent comments from the RBA Governor, Michele Bullock, hinted that an interest rate cut was in the offing as the data flow of weakness and low inflation continues into 2025 but that it is by no means certain.
With the Election to be held by 17 May 2025 at the latest, there could be two RBA interest rate decisions if the poll is on that date.
The dates for the next three RBA meetings are:
- 18 February 2025;
- 1 April 2025; and
- 20 May 2025.
The 20 May date is after Election day.
There is next to zero probability of an interest rate hike with the only possibilities being two more on-hold decisions or a rate cut or two over that time.
At the time of writing, the markets have priced in a one full 25 basis point interest rate cut and an even possibility of another by the time of the 1 April board meeting.
Given the extreme level of household financial pressure at the moment, the 2025 Election could be one where the direction of interest rates immediately before the Election will be important.
To that end, Prime Minister Albanese would be wise to hold out to have the Election on 17 May. An interest rate cut in the lead into the Election and the prospects of another a few days after the Election could, this time, be significant for voters.
If interest rates are cut, the incumbent Labor Party will milk it as a sign of financial relief for mortgage holders and small businesses.
The campaign could be: “We got you through the hard times, we beat inflation, we provided cost of living support and here is the reward — interest rate relief.”
If interest rates remain on hold, the financial pressure on mortgage holders and many small-to-medium businesses will remain acute and the Coalition parties are likely to tap into this during their campaigning.
Or it could be that other matters sway voters.
Renewable energy, the path to net zero, cost of living relief, budget management, tax, health, education and indeed, the competence of the alternative government.
Get set for an exciting few months for economics, policy and politics.
Stephen Koukoulas is an IA columnist and one of Australia’s leading economic visionaries, past Chief Economist of Citibank and Senior Economic Advisor to the Prime Minister.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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