Interest on the ABC

So my question earlier today spurred a much longer post by myself on the ABC’s ‘bloggish’ forum, Unleashed. Here is the link to their site.

Reserve Bank gives Labor pass mark

ABC Unleashed, 7th November, 2007.

After weeks of anticipation, the expected happened and the RBA raised interest rates. Of course the anticipation wasn’t about interest rates themselves but about the political fallout for the Coalition. The issue, however, is what, if anything, does this mean for the Coalition? My guess is that it all meant more for Labor all along.

Let’s start with the obvious first proposition: higher interest rates are the result of a booming economy. If so, then great. However, we all know that, sadly, it also a sign that the boom is going too far and may cause inflation. Now you might not care too much about a little inflation but the RBA does. And with business investment at its highest level pretty much ever, the RBA is also concerned that such decisions are being taken too liberally. So they are pulling on the reins to avoid an anticipated bigger crash later on. Thus, there is a clear verdict here that economic management has not been what it should have been over the last couple of years.

However, if politics is all about future economic responsibility, then it is clear that, at least as far as the RBA is concerned, it is worried about how well the government might manage the economy over the next year or so. The question is: which future government?

Here is where the politics gets a little tricky. First, the RBA will set interest rates anticipating what the government will do over the next few months or more. But, second, it is clear to every person and dog in this country that Labor will most likely be that government. The logical consequence is that today’s rate rise took into account Labor’s likely policies and economic management skills and not the Coalition’s.

But if the RBA’s verdict is as much about the future management under Swan as it is about past management under Costello, what does it mean? To be sure, there may have been a possibility that Labor could have come up with a fiscal policy that neutralised any need for a rate rise. But that might not have got it elected, in which case, this would have all been about the Coalition again. On the other hand, had its proposals been so poor as to label them as economic mismanagers, the rate rise could have been much higher. The RBA may have tried to tie a new government’s hands.

So it seems to me that this all reflects a sensible middle view. The RBA’s verdict on Labor’s economic management is that they will do at least as well as the Coalition. And that is why economics and interest rate rises mean nothing whatsoever for this election season.