How can RBA’s latest interest rate hike impact elections?

Highlights

• The central bank’s interest rate hike decision appears to be a non-political decision on the surface.
• The rate hike of 25 basis points might impact the people’s perception of the current government.
• The current government believes that global pressures are to be blamed for the latest rate hike.

Despite economics and politics being two separate branches of study, they are more tightly linked in real life than one can imagine. The Reserve Bank of Australia’s (RBA) latest interest rate hike decision appears to be a non-political decision on the surface. However, the decision has created much political impact.

The RBA chooses its policy move based on the country’s economic well-being. The historic cash rate hike of 25 basis points was the bank’s first increase in interest rates in over a decade. Concerns loom that the central bank’s rate hike decision could leave a massive impact on consumer sentiment and economic growth.

Consequently, declining confidence could reduce faith in central authorities, including the government. However, one must understand that the central government does not generally assist the RBA in such decisions. In fact, many central banks find themselves at loggerheads with the central government due to a difference in opinion. Despite this fact, some experts believe that the latest rate hike could hurt the chances of the current government being elected back by the voting population.

Why does the government fear a rate hike?

Time and again, Prime Minister Scott Morrison has clarified that the RBA’s decision has little to do with the government's handling of the economy. He stated that the extraordinary global environment is behind the current rate hike, even as many Australians are struggling with household expenses.

How Big Four Banks Performed After RBA’s Rate Hike?

Past evidence suggests that rate hikes have not been ideal for parties in power. A similar situation was seen in 2007 when rising interest rates had negatively impacted John Howard’s election campaign, and he lost government.

The RBA’s interest rate decision has been taken only a few weeks short of the Australian elections, which will be held on May 21. The apex bank took this momentous decision as it felt that the existing support had to be withdrawn from the economy amidst rising inflation. The decision was also based on the country’s better-than-expected performance and a strengthening labour market. However, the decision was majorly motivated by worrying cost-of-living pressures developing globally and in Australia.

Who is to blame for Australia’s cost-of-living crisis?

The opposition has made blunt claims that the Morrison government has been unable to curtail the ongoing inflationary scenario. Shadow treasurer Jim Chalmers has made accusations against the current government, stating that they are not taking responsibility.

However, it is crucial to note that global factors beyond the current government’s control have mostly led up to the current tense situation. Even the monetary policy may be of little help in curbing the rise in prices that have risen out of supply chain snags, the Russia-Ukraine war, and an overall slowdown in global economic growth.

These pressing factors created an environment where interest rates were bound to go up, whether the government likes it or not. Add to that the latest CPI data released by the Australian Bureau of Statistics, and it becomes clear why the rate hike decision was rushed. Besides, many Australians knew that the comfortable borrowing conditions would not remain forever.

What to expect ahead?

The Morrison government has tried its best to persuade voters by reminding them that they can trust the current Prime Minister. When faced with backlash from all sides, PM Morrison has been relying on people’s judgement of his actions and policies.

Treasurer Josh Frydenberg has stated that the current RBA decision is another step in Australia’s recovery journey. Mr Morrison also stated that the high number of mortgage loans lent out in the economy has made rate hikes an inevitable outcome. A number of mortgages have been moved from variable rate to fixed rate, which could potentially be a big boost to the central bank’s balance sheet.

It would soon become clear whether PM Morrison’s reliance on people’s trust would bear fruit or not. Additionally, whichever party wins might have to face an even tougher situation where rising interest rates and soaring costs of living wreak havoc. The newly elected government might also face pressure to work towards higher wages.