The race against the cashrate clock

Since the interest rate rise is the news of the week, I thought we might go over the timing issue of how long it takes for a rate rise to flow through.

The big problem here is that the rate rise doesn’t coincide with the polling cycle in a consistent manner, so sometimes polls will be taken a day after the rise, sometimes nearly a fortnight after the rise – and for us here trying to get a statistical grip on whether the rate rise will come through in the next three weeks, well it all becomes a little cloudy.

But first, let’s go to what we do know.

We know that when a rate rise happens, it boosts both the ALP primary vote and the TPP vote, we saw that the other day.

If we use the monthly averages of Newspoll, we can regress the change in that monthly average (if the TPP goes from 52 to 54, the change would be +2 for example) with the change in the cash rate (if the cash rate rises from 6.5 to 6.75, the change would be +0.25 for example). When we do that we find that there isn’t a statistically significant relationship between the change in the ALP TPP vote and the change in the cash rate during the month that the RBA lifts rates. But if we lag the change in the cash rate by one period, where we are measuring the relationship between the change in the ALP TPP vote with the change in the cash rate in the previous month, out pops the following:

Where D(TPPALP) = the first difference of the ALP TPP vote, which is the monthly change in the ALP two party preferred vote
D(cashrate(-1)) = the first difference of the cash rate lagged one period, which is the change in the cash rate in the previous month.

The coefficient on D(cashrate(-1)) is what we are interested in here, and it tells us that when the cash rate lifts by 1 percent, the ALP TPP in the next month jumps by 7 points. So when the cash rate lifts by 0.25 percentage points, the ALP TPP vote increases by over 1.5 percentage points. The t-Statistic and the Prob value tell us that this relationship is highly statistically significant.

The little graph in the mix shows how it plays out, where the black line represents a change in the cash rate in the previous month, and how it plays out with the change in the ALP two party preferred vote. Notice how the black line spikes when the red line spikes? That’s the visualisation of the relationship we are measuring.

So we would ordinarily expect that the ALP would get a boost in December from the November rate rise.

But when we try to bring that resolution of the data down to the poll by poll level, we run into the problem of the polling cycle not being consistent with the RBA cash rate announcements.

If we graph the change in the cash rate (the blue triangles) against the change in the ALP TPP using every Newspoll since the last election we get:

As you can see, when the cash rate changes, sometimes the ALP vote goes up with it, sometimes the ALP vote goes up the next poll and sometimes the poll after that.

The problem here also, is that there is a fair bit of random movement (sampling error) that might be polluting the monthly change in the ALP TPP vote that can’t really be cleaned up unless we use something like monthly averages.

So the big question becomes whether or not the election campaign compresses the reaction time of voters when it comes to a change in the cash rate?

Let me state to begin with that I don’t believe a word of this guff about how interest rates will shift the focus back to the economy and that will somehow benefit the Coalition. I’d like to see some evidence of that proposition, and the Newspoll “better economic managers” results aren’t evidence as there’s no statistical relationship between the Newspoll economic management question and the Coalition vote at all, and only a small, marginal relationship for the ALP.

The big question based on the actual historical evidence is one simply of time – a lack of it for the ALP or just enough for the Coalition.