Why interest rates and inflation are set to ease

The political economy is near perfect for Labor’s 2025 re-election chances.

Composite image of Australian Prime Minister Anthony Albanese and Treasurer Jim Chalmers outside Parliament House, and Australian money, to signify interest rates.
The Albanese government is likely to preside over falling interest rates and inflation. (Source: Getty)

It is a bit cliched to say two years is a long time in economics, and many things will happen that we can’t predict. But, from my viewpoint today, there are a range of vital economic trends unfolding that will help the Albanese government woo voters in 2025.

Interest rates are likely to go down

With the frenzied, record interest rate hiking cycle from the Reserve Bank (RBA) between May 2022 and May 2023, an interest rate reversal is becoming likely in 2024 and 2025.

As a result, the rate-hiking cycle should be over within the first year of the government’s term. The discussion in the markets at the moment is on when the first rate cut will be and then how many interest rate cuts will be delivered over the next year or two.

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The reasons for this about-face are clear. Inflation is falling, economic growth is slowing and, if these trends continue, they will work to feed into interest rate cuts in 2024 and 2025 – the period leading into the election. If mortgage interest rates are around 50-150 basis points lower as the election campaign gets near and then hots up, Treasurer Jim Chalmers could campaign on the fact that inflation has been brought under control and, as a result, the independent RBA has been able to give meaningful interest-rate relief.

Can the government pull off another surplus?

Adding to the electorally popular news of falling interest rates, Chalmers is likely to be in a position to boast that the Labor government delivered at least one, but possibly two or three, budget surpluses. As a result, he can claim the economic-management high ground by suggesting that Labor’s policies stopped government debt hitting the $1.2 trillion - that was in Liberal treasurer Josh Frydenberg’s last budget - and, instead, it is peaking $150 billion to $250 billion lower.

Further budget surpluses are a long way from being locked in, but it’s an important consideration for Labor over the next two years.

The politics are exquisite.

Lower interest rates for householders plus a big win in the economic-management debate on debt and deficit against the Liberal Party would lay the groundwork for a large part of the election campaign.

Labor is already overtaking the Coalition parties in polls as the better economic manager – these trends in interest rates and the budget will reinforce that trend.

Inflation to fall and wages to rise

The good news is that Inflation is already falling and, during 2024, it is likely to get towards the RBA’s 2-3 per cent target band. This is really good news for the path to lower interest rates, but it will also have a massive impact on the cost of living.

If annual inflation eases to 3.5 per cent by the end 2023, then to 2.5 per cent by the end of 2024 - which looks likely - the pressure on household (voters’) budgets will be easing. This will be a big tick for the government in the mind of many voters.

At the same time, wage growth is set to run at an annual pace between 3.5 and 4 per cent, which would be the highest in more than a decade - real wages will be rising. Cost-of-living pressures would ease further in these circumstances.

Concerns over the cost of living and a decade of wage stagnation were key issues feeding into the Coalition’s election loss at the 2022 election. The high probability that they will be largely ‘fixed’ at the 2025 will be a huge electoral advantage for Labor.

The economic cards are aligning for Labor’s re-election chances.

And, by the way, the bookies' odds two years out from polling day have Labor at $1.20 with the Coalition at $4.50. These are incredible odds this far out from election day but it goes to show that the smart money is being alert to a range of issues that should make Labor a near certainty on polling day in 2025.

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