Australian rate rises may undermine PM’s election hopes

By James Grubel

CANBERRA, April 6 (BestGrowthStock) – Rising Australian interest
rates could undermine Prime Minister Kevin Rudd’s re-election
chances in 2010, with mortgage holders crucial to the election
outcome.

Rudd remains well ahead in opinion polls and is favoured to
win a second term, but higher interest rates could hurt his
popularity and crimp any plans to buy support with pre-election
spending as the government defends is economic credentials.

The Reserve Bank of Australia (RBA) lifted official rates
by 25 points to 4.25 percent on Tuesday and flagged more
increases as the economy returns to strong growth.
[ID:nSGE6340JG]

Adding to Rudd’s difficulties is the fact those likely to
be most affected by climbing rates are in the swinging
electorates on the fringes of Australia’s major cities, where
he needs to maintain support.

“The mortgage belt and marginal seats usually go together,”
analyst John Warhurst, professor of politics at the Australian
National University, told Reuters.

“Continued interest rate rises ultimately put pressure on
the government. I don’t see that as putting enormous pressure
on them just yet. But should they continue to rise every month
or two, then it could apply pressure on the government.”

The rate rise is the fifth since October, with homebuyers
in marginal electorates now paying an extra A$240 ($222) a
month on an average A$300,0000 home loan, with economists
warning of more hikes to come.

“If the economy continues to grow above trend and
unemployment to be below average, then the RBA will quickly
shift to a tighter stance. We could easily see rates at 6 to
6.5 percent by the end of next year,” said Macquarie’s interest
rate strategist, Rory Robertson.

Home ownership is a national aspiration in Australia and
mortgage rates are a hot political issue, with around one in
three Australian households paying off a home loan.

RUDD STILL POPULAR

The latest Reuters Poll Trend found Rudd holds a 7.2 point
lead over the opposition. If carried through to an election,
Rudd would be returned with an increased majority.
[ID:nSGE62G01L].

But economic management and interest rates are always key
election battlegrounds, and the risk of more rate hikes in the
lead up to the poll could prompt the government to be more
cautious with pre-election spending, Warhurst said.

Treasurer Wayne Swan has already announced a two percent
cap on new budget spending until the budget returns to surplus
in 2015-16, although stronger economic data has prompted some
economists to forecast surpluses up to two years earlier.

The government will also be keen to show that mortgage
rates remain lower than under the previous government, Warhurst
said, and that it has a conservative view on spending. The
opposition says the latest rise is the result of reckless
government spending.

Swan responded by saying the Reserve Bank was independent
and its decision reflected a strong economy.

“I know that is cold comfort for a lot of families and a
lot of people in business, but that’s the reality of a
strengthening economy,” he said. “Rates are still lower than
they were prior to the global recession.”

For a factbox on key political risks to watch in Australia,
click on [ID:nRISKAU].

For a factbox on key policy differences between Rudd and
opposition leader Tony Abbott, click on [ID:nSGE63508D].

Stock Market Investing

($1=A$1.08)

(Editing by Michael Perry)

Australian rate rises may undermine PM’s election hopes