Another View on Interest Rates

John Howard’s view that “interest rates will always be higher under Labor” has gotten quite a bit of play lately, with many commentators (eg. Tim Colebatch and Alan Kohler) pointing out that not only are rates not set by the government, but that rates are affected by a plethora of factors other than government policy.

Since rates are heavily affected by the world economy, perhaps a better approach is not to compare average rates, but to look at the average amount by which Australian rates exceed US rates.

First, let’s look at the average Australian Cash Rate across governments. Whitlam: 6.5%. Fraser: 10.7%. Hawke/Keating: 11.4%. Howard: 5.3%

Now, let’s subtract the average US Federal Funds Rate. Whitlam: -1.9%. Fraser: 0.6%. Hawke/Keating: 4.7%. Howard: 1.3%

While Hawke/Keating still come out worst from this analysis, the interesting thing to note is that relative rates have been higher under Howard than they were under Fraser or Whitlam.

If you want to see a graph or play around with the data, click here to download it.

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