Rates and The Election

The Effects of the Upcoming Election on Interest Rates

Prime Minister Julia Gillard caught both the financial and political community by surprise by calling for elections on 14 September 2013. 

Many analysts believe that the reason underlying her announcement is the increased criticism her minority Labor government faces about their abandonment of the pledge to deliver a budget surplus in 2013. 

When Treasurer Wayne Swan initially presented the 2013 budget in July 2012, it included a forecast of $1.5 billion. In October, he announced the surplus would only be $1 billion. 

Unfortunately, this trend has continued and the now a $10 billion deficit is forecast for 2013.

While Paul Bloxham of HBSC Australia sees this is a significant improvement over the 2012 deficit of $44 billion, those in the opposition parties have not been as generous in their assessment.

How Labor Got It Wrong

Much of the Labor budget depends upon generating revenue from taxes on the mining industry. As China's economy has begun to cool somewhat, the demand for raw materials has dropped, especially for iron ore. As a result, investors are pulling back from the mining industry, which was spurred by announcements by Rio Pinto and BHP Billiton of their plans to slow expansion and cut jobs. This slowdown in the mining industry has revealed the flaws in Labor's scheme to rely on taxes from the mining industry.

Both Parties have lost the electorates trust in the past

The Liberal Alternative

The opposition Liberal party advocates for cuts in government spending to close the budget deficit in a manner similar to the austerity schemes of the governments in Europe and the UK.
Given that the Australian economic growth has slowed to about 3 per cent and unemployment as risen to 5.5 per cent, which is the highest it has been in the past three years, the wisdom of government spending cuts has been brought into question. 

In October 2012, the chief economist of the International Monetary Fund (IMF), Olivier Blanchard, discussed his observation that the austerity measures enacted in the European Union have done more harm than good by choking  economic recoveries by withdrawing the lifeblood of government stimulus spending that makes up for reduced consumer demand.

RBA Interest Rate Trends

The Reserve Bank of Australia's interest reduction cycle seems to support the viewpoint that the Australian economy needs some stimulus in order to stimulate continued economic growth.
With its 0.25-point cut of interest rates to 2 per cent in December 2012, the rates have reached lows not seen since the 2008 Global Financial Crisis.

While the global economy has shown some optimistic signs of late, Westpac's Bill Evens does not think they are sufficient to support growth in demand.

Bottom Line: Interest Rates and the Elections

The forecasts from analysts for the election and interest rates are as different as the parties themselves.

Norma Martin Whetton, an interest rate strategist, thinks that a lengthy election campaign will put a damper on consumer confidence.

Normally interest rate drops favour the incumbent, but if the RBA drops interest rates as a result of the slow growth and high unemployment, the advantage goes to the opposition.

ANZ's Andrew Salter thinks that the call for early elections suggests a change in government, and this will affect the interests rates as business investment planners make their assessments of how austerity measures will affect the overall economy.

Overall, investors can expect to see broad swings in interest rates during the next several months in reaction to the developments in the election campaigns

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