Likely Effects of the Wentworth By-Election Result on Future Interest Rates

Amicus writes to you “on the ground” on this issue given our offices are in the Wentworth electorate and the majority of our four staff live in the area.  Prior to the election, Wentworth was the tenth safest seat for the coalition government with a 17.7% majority, however it looks as this has been overturned with a 19% swing to independent Dr Kerryn Phelps, defeating a strong liberal candidate Dave Sharma.  This by-election recorded the largest ever swing against the liberal party in any by-election ever and for the first time since federation the Wentworth electorate or its predecessors is not held by the liberal party or its predecessors.

While there were special factors at play being the seat was formerly held by Malcolm Turnbull and the Wentworth voters are more diverse and eclectic than those in most electorates, the size of the result suggests a significant backlash against the liberal party.  Of interest, pre-poll and postal votes cast were much more favourable to the liberal party than votes cast on Saturday, leading some commentators to speculate the mis-steps by Scott Morrison and the liberal party in relation to deciding to open the debate on moving the Australian embassy to Jerusalem, confusion over policy on discrimination at religious schools, and support by liberals in the senate for a controversial “It’s OK to be white” motion, which affected the result.

The result portends a heavy defeat for the coalition government at the next general election in May 2019 (or before).  If a Shorten labour government is elected with a large majority it will be better placed to enact financial policies that are not necessarily universally popular such as the abolition of negative gearing and franking credit refunds, reduction in capital gains tax allowances, tighter rules on tax breaks for superannuation investments, increases to the minimum wage either directly or via penalty rates, and increases to benefits for lower paid workers at the expense of high earners (investors and big business).

The policies will likely be negative for house prices as a labour government tries to increase affordability and reduce tax incentives for real estate investors.  Labour’s policies are also likely to be more inflationary than the coalition’s with more monies flowing to lower paid workers who will generally spend this extra income rather than save it.  Hence the overall effects are probably to cause future increases in the cash rate to be brought forward due to the creation of inflationary pressures than would otherwise have occurred under a coalition government.

Until May (or whenever the next election occurs), we expect no controversial policies from the coalition government as it tries to shore up its vote and convince the electorate it is not a party at war with itself.  The greater the dis-unity between the liberal party’s internal factions the likely the heavier the defeat at the next election and the stronger the position an eventual labour government will be in to implement its policies.

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