Why is it that, in the endless discussion in the mainstream media about who had a ‘better record on interest rates’, we never hear any mention of the real interest rate? If you go on nominal rates, then no matter what interest rate you pick, or what period, Labor is going to look terrible in that comparison. The average nominal bank prime lending rate for big businesses was 14.3% and 8.7% for the Hawke-Keating and Howard Governments respectively. This is an average over the whole period of office minus the first year (during which outcomes can arguably be blamed on the previous regime). But if you calculate the real interest rate, the corresponding numbers are 8.8% and 6.1%. That’s still unfavourable to Labor (unless you are a rentier), but a difference of 2.7% doesn’t sound nearly as bad as one of 6.5%.
Given that this is the case, you’d think Labor’s politicians and propagandists would be constantly insisting that we compare the real rate. They could presumably make some good excuses for the 2.7% which would sound hollow if applied to the higher figure. For example, that real rates need to be higher when there is high inflation, because higher inflation is more variable and makes for greater risk — and that the inflation was caused by Malcolm Fraser and his Treasurer.
I’m not saying that real rates are straightforward to calculate. Here I’ve used the annualised CPI from the previous quarter to make the adjustment, but that’s not necessarily the best proxy for inflation expectations. However, I doubt that a different choice would significantly alter the comparison.
Nor am I saying that it’s only the real rate that matters, or that inflation isn’t a bad thing. But it is, at the end of the day, easier to pay off a loan at 17% when your income is rising at 10% per year than when it isn’t. True, a very high nominal rate front-loads debt repayments, so that the early repayments are effectively a repayment of principal. That makes life hard for some businesses and mortgagees, but an audacious spin doctor might get away with arguing that this is good for national savings.
Not all economic journalists let Howard et al. get away with comparing nominal rates. But most of them do, and Labor politicians rarely set the record straight. Are they afraid of antagonising voters by appearing to rely on some esoteric technical debating point? Surely interest in real terms is not that subtle a concept.