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 ANALYSIS |
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Politics
Forget the mud, it’s about interest rates
Mike Dobbie, August 28, 2007
Forgetfulness, mud-slinging, strip clubs, ethics. These are sideshows to the main game: will interest rates determine who wins on election day? Mike Dobbie looks at how the Reserve Bank also has a history it would like to forget
In the space of a fortnight two committed Christians, both alike in prime ministerial ambition, have their pasts exposed in the media. One denies boastful promises at a wine-soaked dinner were ever made by noting that the boasts were never acted upon. The other apologises for going to a New York strip club four years ago but not remembering anything about it.
Not quite a 21st century version of the strife between the houses of Capulet and Montague. More a couple of lame distractions from the main event: how the hip pocket nerves of Australians in the mortgage belt will react to another hike in interest rates.
Kevin Rudd’s drunken evening in New York with a Murdoch newspaper editor was never likely to harm his poll position. But that didn’t stop the manager of the Scores club demonstrating a feat of memory that eluded the Labor leader – perhaps thanks to a briefing from a Labor staffer. The manager said he remembered Rudd from four years ago (astonishing), how Rudd had behaved like a gentleman in the “gentleman’s club” (gosh) and that Rudd left so quickly he didn’t even finish his beer (golly).
Peter Costello didn’t really refute the claims of three journalists about what he said at an off-the-record dinner, except to say that the boasts he allegedly made never came to pass: he didn’t do a “Keating” by quitting the ministry to carp at John Howard from the backbench until the Prime Minister’s job fell into his lap. All the episode did was emphasise that Costello knows he didn’t have the numbers to challenge Howard and how the Canberra press gallery has its own curious take on ethical values – seemingly ignoring the public’s right to know by having cozy dinners with politicians on “unattributable background” and then getting caught in a further dilemma when a press secretary demands the comments were made off-the-record, tangling up the journalists’ ethics still further when they breech that arrangement later.
The phony election campaign in the months since Rudd became Labor leader has seen both sides focussed on how to gazump one quasi-policy announcement with ideas that are even grander and more expensive than the last. States rights are being trampled on as Canberra employs “aspirational nationalism” to take over a Tasmanian hospital and then Labor ups the ante by saying it will take over all hospitals. John Howard says referenda are ok provided they apply to merging Queensland local government and, if you must, nuclear power – that’s big of him.
But it’s interest rates that may dictate who gets control of Parliament. With an electorate exposed to massive levels of debt, the Reserve Bank’s modest increases to date are still biting.
A generation of young Australians has grown up since home loan interest rates were about 19 per cent. In 1988-89 the Australian economy was enjoying rapid growth and the Reserve Bank, under then governor Bob Johnston and his deputy John Phillips, wasn’t watching the game. So it began hiking up interest rates belatedly, the delay forcing the rates to go up higher for longer sparking enormous pain with defaulting loan repayments, failing businesses and a sharp rise in unemployment.
The issue sparked furious debate. Then Treasurer Paul Keating in June 1989: “I’ll guarantee you that if you walk into any pet shop in Australia, the resident galah will be talking about micro-economic policy”. Seven months later, in January 1990, the Reserve Bank began reducing the official cash rate, with a cut of one percentage point to 17 per cent.
But despite the pain that crippling rates were beginning to have, that didn’t trigger a change in government. On March 24 that year, the Hawke Government won an historic fourth federal election largely through a second-preference strategy that convinced voters to vote ahead of the Coalition if they would not give their first preference to Labor.
Interest rates continue to cause suffering. In November 1990, data showed the economy had fallen into recession, the worst in 60 years. “This is the recession that Australia had to have,” Keating said as unemployment escalated to more than million people out of work.
When the Howard Government was first elected in 1996, the official rate was at 7.5 per cent. In December 2001 it fell to 4.25 per cent. Since then there have been nine increases to the current cash rate of 6.5 per cent. Current Reserve Bank governor Glenn Stevens says he will raise them again if necessary regardless of the political sensitivities this close to polling day.
Let’s hope Stevens and his board have a better grasp of how the economy is really travelling than their predecessors did in the late 1980s/early 1990s. There is a lot more than political ambition at stake. And if mud-slinging about events in the recent past haven’t hurt Rudd or Costello, the Reserve Bank’s past actions prove they can do more harm than boasts in a Canberra restaurant or a beer in a New York strip club.
More articles from this week's CompareShares newsletter:
Markets: Is the party over for the US?
Forums: The mysterious world of stock forums
Superannuation: Stay with super or convert to a pension?
Ask the expert: How to determine the best stock to trade
Politics: Forget the mud, it's about interest rates
Stock of the week: Mermaid Marine buoyant
Smart Investing: Risks of beating the market
Analyst report: Is sub-prime draining our resources?
Commodities: Gold hasn't lost its glitter
Whatever your views, you can discuss this article - or any of Mike's articles - on our message board Your 2 Cents, in the Analysis section.
Mike Dobbie is business consultant. He is a former managing editor with Fairfax Business Magazines.
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