Australia and the curious case of the highly politicised interest rates Politics has definitely been an element in the discussions around who will replace Ben Bernanke at the Fed. But we suspect even the US doesn't have quite the partisan obsession Australia boasts. Australia's central bank cut its cash interest rate to 2.5 per cent today, a record low. Australians being a rather highly leveraged bunch, the RBA's interest rate decisions are almost always reported with focus on the implications for mortgagees. And this cut happened to be made a few days after an election was called which, surprise surprise, is set to be tightly contested... Cue much speculation about what this will mean for the ruling Labor Party's chances at the September 7 election. Where did this all begin? As far as we know it was in 2004, with then-prime minister John Howard in campaign mode: "It is an historic fact that interest rates have always gone up under Labor governments over the last 30 years, because Labor governments spend more than they collect and drive budgets into deficit," he said. So it will be with a Latham Labor government. He went so far as to pledge rates would always be lower under a Coalition government, saying: "I will guarantee that interest rates are always going to be lower under a Coalition government.." At a stretch he might have had a point, because yes fiscal policy does have implications for monetary policy. But really it's hard to see the logic in a politician wanting to pin their credibility so explicitly to a number that is both hard to predict, and driven by numerous variables other than those in control of the government of the day. In any case, the theory didn't really work out for Howard; rates were raised in the RBA's last decision before the 2007 election, when Labor took power from Howard's conservative coalition government. To make it blurrier still, the Guardian points out that the average mortgage rate for the current Rudd/Gillard/Rudd stretch of Labor governments is almost exactly where it was during the conservative Howard's era. Nevertheless, it's an idea that is perpetuated by some. How much traction the idea of a policy- or politics-driven mortgage rate has among actual voters is hard to know, but regardless, the local media have decided that it means something. And one seasoned observer from the foreign media speculated that the removal of the "easing bias" in today's statement might have been motivated by a desire to minimise political chatter. We're not convinced. Central banks consider every word of their statements very carefully. The removal of the past several months of easing references - which basically said inflation allowed for more easing if needed - was noted by every Australian economist and RBA-watcher, so it should actually mean something, regardless of the political cycle. At least it means something for this "easing cycle" - probably that the RBA is wary of cutting too far while house prices rise, and wants to see how the currency moves and previous rate cuts take effect. In particular there is the inflation data, which is only published quarterly in Australia, and might see further effect from a weakening currency on tradables. The RBA publishes its Statement on Monetary Policy on Friday, and presumably the thorny question of what might substitute for the peaking mining investment boom will feature therein. Foreign financial types visiting Australia are sometimes amused at the obsession with bank mortgage rate spreads over benchmark rates, and how iron ore prices are a subject of dinner party conversation in some parts. We're cool with that; both are important topics for members of the highly leveraged, China-exposed Australian economy. The bigger question is whether the analysis, and the accepted wisdom, on either subject is anywhere near correct. Related links: Labor means rate rises, PM claims - Sydney Morning Herald Australia cuts rates to record low - FT