Blog

Political Winds in Australia and the Likelihood of Lower‑for‑Longer Interest Rates

Although the Commonwealth Government can borrow for 10 years at the lowest rate on record, the burden of policy support has continued to fall on the Reserve Bank of Australia.

As Australians prepare to go to the polls on 18 May, the middle of this election campaign is an opportune time to revisit the ongoing conflict between politics and effective economic policy. Its implications are also highly relevant as Australia’s economy continues to slow.

Politics are inherently focused on the short-term goal of appealing to the electorate, which can lead to populist measures, rather than on longer-term policy, which can potentially benefit the overall economy. In Australia, it has lately become politically popular, and apparently a vote-winner, to achieve “budget balance.” This myopic focus on austerity rather than on longer-term investments that can raise productivity, like infrastructure, is likely to have important consequences for the economy. Indeed, it has been the death knell of many economic expansions historically.

Lack of balance

While there will no doubt be bouts of potentially vote-winning spending promises by both the Liberal and Labor parties, these are unlikely to tackle the long-term reality: For Australia’s economy to sustainably grow, there needs to be a balance of monetary and fiscal policy settings throughout the cycle. High school economics students learn about the importance of this mix between fiscal and monetary policy, yet politicians seem to have thrown out the textbook.

Although the Commonwealth Government can currently borrow in the bond market for 10 years at around 1.8% – the lowest rate on record – the burden of policy support for the economy has continued to fall on the Reserve Bank of Australia (RBA), and by extension, the already heavily indebted Australian household. Some observers are lately hoping policy rate cuts will allow households to lever up even more to support the flagging housing market.

The RBA is a highly credible and pragmatic body that has been responsive to economic reality. The expectation of an underwhelming fiscal response to Australia’s slowing economic environment means the RBA is likely to take on the task once again.

Investors need to focus on what is likely to happen, not what should happen. So as long as it’s politics as usual, we think investors in Australia need to be prepared for even lower interest rates for even longer.

The Author

Robert Mead

Head of Australia, Co-head of Asia-Pacific Portfolio Management

View Profile

Latest Insights

Related

Disclosures

Tokyo
PIMCO Japan Ltd
Toranomon Towers Office 18F
4-1-28, Toranomon, Minato-ku
Tokyo, Japan 105-0001
813-5777-8150

Financial Instruments Business Registration Number: Director of Kanto Local Finance Bureau (Financial Instruments Firm) No.382. Member of Japan Investment Advisers Association and The Investment Trusts Association, Japan.

Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized.

Past performance is not a guarantee or a reliable indicator of future results. PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

All investments contain risk and may lose value. Investors should consult their investment professional prior to making an investment decision.