Why an interest rate rise during the election campaign could spell the end for Morrison

The Reserve Bank’s obligation to clobber inflation when it breaks out of its economic comfort zone has made the government so anxious that some inflation-inducing measures expected in the March 29 budget, such as its long-boasted expensive tax cuts, have been deferred.

That’s because something politically more serious than reneging on tax cuts could happen: an interest rate rise during the election campaign.

Voters might blame Putin for higher petrol prices, but only Scott Morrison would be held responsible for higher home loan costs. The political consequences could be as huge as our rampant real estate market.

Treasurer Josh Frydenberg on Radio National said help for households fighting inflation would be “temporary, targeted measures”. And he conceded inflation at 3.5% and feared to be heading to 5% was “more elevated than previous thought”.

The government hopes to avoid an interest rise in the next two months before the poll expected on May 14, but is already accepting it won’t be put off forever. Rates will go up soon and there will be a string of them through the rest of the year, as forecast by the finance industry. Banks might increase mortgage rates as the cost of cash sourced overseas goes up.

If the RBA is to keep inflation within the boundaries of 2-3%, as required by its brief, it will have to increase record low official interest rates now at 0.1%. That would damage household finances for thousands of voters and severely weaken the government’s claims to be top economic managers.

Morrison says interest rates under Labor would go up “more than they need to”, an acknowledgment that his government couldn’t prevent rises completely.

For once it’s a political problem which can’t be resolved by the Liberals’ much resorted to question: what would John Howard do? The former Liberal prime minister narrowly dodged an interest rate rise during the 2004 election campaign but soon after they went up six times, including during the campaign for the 2007 election in which he lost his seat as well as government.

Two weeks before the November 24 poll the RBA pushed the official rate up by 0.25 percentage points to 6.756%. Howard was behind in the polls, much like Morrison today, but could not prevent the rate rises that worsened his electoral changes.

“I would say to the borrowers of this country who are affected by this change, that I am sorry about that,” he said before the November 2007 election. “I regret the additional burden that will be put upon them as a result.”

The Howard experience is a haunting fixture in Liberal lore. And the burden Howard bemoaned would be much greater this election. The figures are staggering. The consequences could be as huge as our rampant real estate market.

The government’s own calculation is that low interest rates have been a $600-a-month saving for those with a $500,000 mortgage. A rate rise would see that saving stunted.

Australians now own $9.9 trillion worth of real estate with a 25% jump — $2 trillion — in the past 12 months. These owners had to get the money from somewhere, and most borrowed big as prices rose and the minuscule official interest rate of 0.1% produced cheap mortgages.

The Australian Bureau of Statistics calculates that Australian home owners and renovators took out loans between January and October last year worth $305 billion, the bulkiest borrowing of its type recorded by the bureau. The ABS says the total borrow for the 10 months was more than for all of 2020. And it reports that loans for owner-occupiers and real estate investors jumped by 2.6%, or $33.6 billion, in January this year alone.

Cheap mortgages would disappear as the official rate went up, adding higher repayments to already strained household expenses.

Frydenberg has conceded the obvious and advised punters to factor high loan costs in their household budgets just as business is doing. He told Nine newspapers this week that “the market has been pricing in — it’s a statement of fact — higher interest rates in due course”. He doesn’t comment often on interest futures — at least in public — as that might be seen as pressuring the RBA.

Same with Labor’s Treasury spokesman Jim Chalmers, who also has saluted the RBA as the decision-maker. But he has scoffed at Morrison’s implicit claim that interest rate rises were certain if Labor wins the election.

“I think the message from the Reserve Bank governor [Philip Lowe] yesterday was unsurprising in lots of ways,” Chalmers said on March 3. “He said that interest rates can’t stay near zero forever, but he’s in no rush. The RBA board, which is independent, doesn’t seem to be in a rush to raise rates.

“The other important point: at no point does he say that it’s dependent on who wins the next federal election. These sorts of issues that he’s been talking about are independent of who might be in power.”

This article was first published by Crikey.