Thinking Money

Tony, Kevin, interest rates and other mysteries

A coup d’état, also known as a coup, a putsch or an overthrow, is the sudden deposition of a government, usually by a small group of the existing state establishment — typically the military — to depose the extant government and replace it with another body, civil or military.

A coup d’état is considered successful when the usurpers establish their dominance. When the coup neither fails completely nor succeeds, a civil war is a likely consequence. [Courtesy of Wikipedia.]

As some of you will know I recently travelled overseas on a bit of a bucket list cycling odyssey. I had no sooner left these fair shores than a political coup was afoot and Kevin rose phoenix like from the ashes of his previous prime ministership. Needless to say no one in Switzerland gave a bugger what was happening in Australia and so we following the unfolding events via the web and texts from friends at home.

It was only when we got to major cities and airports that English print newspapers were available and we got some sense of the level of international coverage events at home were getting. I was particularly taken with one journalist’s comparisons of the Australian political landscape and stability with that of post-war Italy. Says it all really!

What came across was a general perception internationally that Oz has pretty much dodged the GFC bullet and is in a better position than most despite the political upheavals of the past three years or so.
Anyway, it now looks like a resurgent Rudd is going to give the Abbott led opposition a run for their money and frankly that’s bit of a problem. While Julia was in the chair it seemed pretty clear that our next prime minister would be named Tony. Turns out our next prime minister was named Kevin albeit maybe for only a very short second stint. Are you still with me?

The general feeling that I was picking up on was that the Gillard government was on the nose and had lost considerable consumer and business confidence. As we have learned over time a lack of positive sentiment tends to lead to declines in consumer spending that leads to falls in demand and business investment. With little upward demand pressure on prices or wages, inflation remains under control and the RBA has no good reason to lift the cash rate. In fact, as we have seen of late, the RBA has dropped the cash rate to a record low in a bid to kick start consumer confidence and demand.

All that seems to have happened is that consumers have left their home loan repayments as is while rates have fallen. That’s led to the biggest build-up of advance payments on home loans that this country has ever experienced. There’s also a stack of dough sloshing around in bank savings and investment accounts and superannuation funds. With such uncertainty out there no one seems willing to spend the nest egg. If you happen to work for Ford in Geelong it turns out with good reason.

So what does all this mean for interest rates you ask? Buggered if I know but here’s a wild guess. I suspect that had Julia lost the election to Tony there would have been a consequent spike in consumer confidence, demand and business investment. The resultant upward pressure on prices and wages may well have caused the RBA to lift the official cash rate to counter inflation.

Put simply it seemed to me that there was a real pent up desire for a political change and until that change occurred the punters were not going to spend. Thus, a win for Tony was, in my mind, a possible driver of an increase in interest rates. If you think about it that’s not necessarily a bad thing. Central banks drop official cash rates to try and kick start ailing economies. The lower the cash rate the greater the challenges facing that economy. Obviously very high rates also suggest out of control inflation so all things in moderation.

Of course, now that the polls are saying that Kevin is a chance of winning the soon to be rescheduled federal election my entire thesis is under threat. Will a re-elected Rudd government continue on the path of debacle-driven incompetence witnessed the last time around or has Kevin really changed?

If you are punting on Tony it might be a good time to have a look at fixed rates. If it’s Kevin you favour stay variable. And remember, it’s not the rate you borrow at that’s important, it’s what you did with the money.

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