As Henry has been saying for what seems like eternity, interest rates have to rise. Indeed, despite the elevated oil price, rising inflation and the subsequent interest rate hikes, the Roy Morgan Consumer Confidence Rating has been showing renewed strength — hinting that aggregate demand is not showing any consistent signs of abating. Henry has said that at least two more rate hikes are needed, but at this stage we are most likely going to need more.

Rising interest rates are terrible news for incumbent Governments, on both a Federal and State level. This was why, when the Second Quarter CPI figures were released, both our beloved leader John Howard and his sidekick Peter Costello rushed to pin the result on bananas and petrol — they were distancing themselves from the fallout.

As the Morgan Poll has consistently shown over the last three months, the ALP is enjoying a significant advantage over the Coalition Government. Today’s Federal Morgan Poll shows that the ALP has maintained its advantage — with the two party preferred vote showing ALP on 53%, L-NP 47%.

The electorate is clearly questioning the Federal Government’s economic credentials, as rising interest rates are hitting the crucial mortgage belt electors in the hip pocket, particularly in New South Wales and Victoria. Furthermore, more rate hikes are likely to exacerbate the impact of the drought on country Australians. Many farmers will be going (further) into debt and are unlikely to be pleased with increased interest payments.

Obviously, the mortgage belt and the country vote are both crucial for the incumbent ALP Government in Victoria, and the electorate is also questioning their economic credentials.

Today’s Victorian Morgan Poll shows that primary support of the Bracks Government is currently 41%, and the Liberal Opposition is 38%. On a two party preferred basis, the Bracks Government holds an 10 point lead (ALP 55%, L-NP 44%). Importantly, however, these figures show a significant swing to the minor parties, indicative of a general disillusion with both the Victorian ALP and L-NP.

Special Roy Morgan qualitative analysis is especially illuminating — many Victorian voters say they are drawn to the Liberal Party because of the perceived economic incompetence and squandering of the Bracks Government. Rising interest rates will further exaggerate this perception of economic incompetence, just as it has in Federal politics.

As everyone knows, an election is decided in the last week, sometimes even the last day. The agenda will change over the next month as emphasis is placed on the economy, with rising interest rates and the effect of the drought. If the Baillieu-led Liberal Opposition is able to highlight the economic ineptitude of the Bracks Government, then the election will be much closer than is expected.

Both the State and Federal Governments should have acted earlier to rein in aggregate demand — but they didn’t. The RBA should have listened to Henry’s monthly advice and hiked rates sooner; there would be fewer hikes needed and they would not have come at such an important time for both State and Federal Governments.

Read more at Henry Thornton.