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.

You tell me which is more likely?

Rates are up. You tell me which scenario is more likely?

Nice Newspoll, Shame about the Rates.

This was me in Crikey today HERE. It’s free so you can have a squiz over there or keep reading.

When your luck is up, you just can’t take a trick.

Today we have the best Newspoll for the government since November, even if it’s only due to a bit of minor party preference noise, but as far as the image goes – a good poll is a good poll is a good poll.

Ordinarily, the popular media outlets would have a couple of stories splashed around hailing a comeback, the not so popular media outlets would probably be going hysterical and the nightly news would lead with the story; Laurie Oakes telling Nine viewers in tones of gravitas that the election is now a competition.

But this is no ordinary week.

Today’s papers are all about the ponies, tonight’s news will be about them as well, Wednesday’s papers will be all about the ponies and interest rates, Wednesday night’s news will probably be all about an interest rate rise, Thursdays papers will certainly be – and then the media attention and narrative turns to the first polls after the rate rise (assuming there is one).

Where does the best poll for the government in 12 months fit into that cycle? Well, it doesn’t. Not as far as normal people are concerned. But the particularly nasty piece of bad luck in this sequence of unfortunate events for the government is what is likely to come next.

The headline two-party preferred result of Newspoll has been bouncing around an awful lot lately – it’s almost become the great oscillator.

This week’s Newspoll figures have the problem of slightly undervaluing the preference flows the ALP receives from the minor parties, meaning that it’s more likely than not that the next Newspoll will probably fix that up. These slight rounding problems and sampling volatility of the minor parties all come out in the wash over a few polls.

When you combine that with the ALP primary looking rock solid at 47/48, it’s almost expected that in the next poll or two, the two party preferred headline figure will show the ALP increasing its lead – simply as a result of the high ALP primary vote combining with this minor party sampling error and rounding issues.

But should that happen, the headlines will undoubtedly scream “Interest Rate Backlash!” as some new 55/45 poll shows the ALP gaining a two point lead from the previous poll, the best poll the government had enjoyed for 12 months, but one which no-one paid attention to because the ponies were on.

Somehow, the gods look to have conspired against the government to the point where their best Newspoll result in a year will likely be completely ignored in terms of any beneficial media coverage that matters, but instead will create the platform for a very dominant media narrative that launches against them if rates rise tomorrow and the next Newspoll moves toward the ALP simply as a result of polling noise. And with it goes the second last week of the campaign.

Howard must be pulling out with absolute frustration those few remaining hairs he has left on his noggin.

He just cannot take a trick.

Newspoll MkII

An interesting little question popped up in Newspoll, and to fully chew it over properly, it needs to be put in the appropriate context:

It looks like most people are pretty locked in on this question, with even numbers of ALP and Coalition supporters suggesting that they may cross sides in the event of a rate rise. The alternative is that maybe people don’t realise how they will act until they actually see the money coming out of their bank account.

History gives us a good suggestion here of how people actually react to rate rises as opposed to whatever they may say about how they would react.

The other thing of note on the Newspoll vote was the low minor party support. This gets us on to how the small minor party vote estimates are highly volatile because they are so small.

To highlight this, we’ll go through a two step process. First, if we subtract the TPP vote of Coalition from the TPP vote of the ALP for every Newspoll since 2006, we’ll get a TPP spread. Then if we do the same for the primary votes, we’ll get a primary vote spread. These two together show us how much of the difference in the TPP vote is explained by primary votes. If we then subtract the primary vote spread from the TPP vote spread, we end up with a figure that represents how much of the TPP spread is caused by the minor party vote.

That might sound a little complicated, but it’s pretty easy once you chart it.

If we blow that minor party residual effect up to highlight its movement we get:

What this chart tells us is how much of the TPP spread is explained by the minor party vote. This minor party vote is relatively volatile as a result of it being a small number in a larger pool. For instance, if there was a survey of 100 voters and 40 were voting for party A, 40 for party B and 10 for party C, if in the next survey it turned out that an extra person was voting for party B, the vote for party P would become 41, which is a 2.5% increase, but a 1 person increase in Party C (from 10 to 11) would be a 10% increase in the Vote of Party C.

With the sizes of the polling samples we use in Australia, this effect never fully washes out of the system. So small party votes estimates are, proportionally to their vote size, more affected by sampling noise than the major party votes.

As a result of that, and because TPP estimates are based on the distribution of those noisy vote levels, a fair bit of the TPP spread is quite noisy. Hence the TPP estimates bounce around more than they would be moving in reality.

Why Rates Matter

Me in Crikey yesterday HERE

And below:

Yesterdays post “Rates of Gloom” was actually a more in-depth spin-off of this post, so for those of you struggling to follow the stats, this should make everything a lot clearer.

In Rates of Gloom we just modelled the relationship we see below, but also accounted for the effect of leadership changes (the leadership dummy variables) and the honeymoon period that both leadership changes and interest rate rises enjoy (through the time trend variable). Just as the leadership changes of Latham and Rudd increased the ALP vote before it declined from that peak slowly over time as the honeymoon ended, so to with an interest rate rise. After a rate rise, the ALP vote moves up, but then slowly over time it pulls back slightly. There are more complicated ways to model that type of behaviour, but the time trend variable did the job adequately.

So if you read this post first and keep the above in your thought orbit, for those of you not big on the stats side of things it should make Rates of Gloom a bit easier to follow.

———————————————————–

With interest rates and widespread navel gazing about the political consequences taking up the media-space, today instead of picking the verbal lint from our bellybuttons over the issue, how about we go to some spiffy little charts that sum up perfectly the millions of words that will be written over the next month.

First up, let’s run the RBA cash rate against the PM dissatisfaction rating over the period 1999-2007, using Newspoll monthly averages for the latter:

Now how is that for a snazzy little leading indicator!

Next up we’ll run the cash rate against the Opposition primary vote over the same period using Newspoll monthly averages:

 

One word sums that up – Ouch.

Now for the relationship between the Opposition primary vote and the PM dissatisfaction rating:

And that sums up the debate – three graphs are worth a million words.

The only question becomes whether interest rate increases lift the Opposition primary vote directly, whether it increases the Opposition primary vote via PM Dissatisfaction or whether it works via both channels?

As far as the Coalition is concerned however, it’s probably a moot point.

UPDATE:

I was just informed of a pretty spiffy site:

“Soapbox is a unique Australian political archive of
federal elections, bringing together key historical documents and
audio-visual material, and making them available to students, researchers,
journalists and the general public.”

It’s a cracker of a site if you are into historical election material. Very, very, very much worth a visit:

http://soapbox.unimelb.edu.au/

Rates of Gloom

It’s equation time!

So how important is the cash rate on the Oppositions primary vote?

We’ve modelled this before over here in terms of the effect a rate change has on the primary votes of major parties and how long it takes for that effect to flow through, but today we’ll take a different approach entirely.

What we’ll do today is make a simple model that can explain the effect (if any) the cash rate level has on the ALP primary vote by taking into account the ALP leadership and any linear time trends that may be floating around in the mix.

So to start with we’ll be using the period from 1999 through to the present, and the basic model we’ll be looking at is:

Where:

ALP = the ALP primary vote at time t (where t is the month).
Cash Rate = the RBA cash rate at time t.
Time = a time variable that has a value of 1 in January 1999, 2 in February 1999 etc right through to its current value of 106 in October 2007.
DummyRudd = dummy variable which has a value of 1 for the periods of the Rudd leadership and zero for all other times.
DummyLatham = dummy variable which has a value of 1 for the periods of the Latham leadership and zero for all other times.

So what we are modelling here is how value of the cash rate explains the level of the Oppositions primary vote, but where we also account for the two leadership periods of Latham and Rudd having an effect, as well as allowing for a linear trend to manifest in the vote.

Once we run the regression model, our results come out as:

Which, for the non-geeks can be visualised as this:

[Note: I've ignored the autoregressive nature of the polling series so that the results can be better visualised for the non math-geeks here]

The “Fitted Primary Vote” in the graph is our modelled vote based on the regression equation.

So what to make of it?

For every 1 point increase in the cash rate, the ALP primary vote increases by 3.5 points. So if rates were to rise by 0.25 in November, the ALP primary would be expected to rise by 0.9 points, or around 1 point.

It also suggests that the Rudd leadership (or what has happened during the period of the Rudd leadership) has boosted the ALP primary vote by around 8 points, and that Latham boosted the ALP primary vote by about 2.5 points (which is fair enough considering that Latham took over from the dire polling position Crean had created).

All up, our variables explain about 75% of the movement in the ALP primary vote over the period 1999 through to the present.

If we now run the equation again, but this time using the ALP two party preferred vote, remove the time trend variable and use the period from December 2002 through to today (simply because my TPP figures before that are in a database that I’ve stuffed up and need to rebuild ) we get:

This gives us a visualised model of:

 

Again, our variables here explain about 75% of the movement in the ALP two-party preferred vote, the cash rate has nearly identical influence on the TPP here as it did to the primary vote in the first equation, Latham again lifted the TPP vote about the same as he lifted the primary, but this time the Rudd leadership has increased the TPP vote only around 3.5%. This is expected as remember the ALP TPP had been growing constantly since the last election, it was their primary vote that got the big boost under Rudd.

So all up, if rates rise by 0.25 points, the ALP can expect their primary vote to increase by about a point, and their two party preferred vote to do likewise.