Following the defeat of the building ‘watchdog’ (‘ABCC’) legislation in the Senate, the federal government has the ability to call a double dissolution election. For those unfamiliar with what this means, a DD involves the dissolving of both houses of Parliament; the House of Representatives and the Senate. It is designed to resolve a deadlock when the government of the day cannot get its legislation passed by the upper house or Senate. It effectively sends the decision on the legislation to the people to vote in fresh elections.
It has been used six times previously in Australian history, the last in 1987. A DD election has produced mixed results for the government of the day, with two governments losing the resulting election. A DD in 2016 has not yet been called but the Prime Minister, Malcom Turnbull, has previously stated that if the ABCC legislation was rejected he would call a DD election. The likely date for this is after the 3 May federal budget on Saturday 2 July.
An interesting point to note is that Australia must hold a federal election this year in any case but in a ‘regular’ election only half of the Senate members stands for re-election. In a DD election the full Senate stands for re-election meaning that the composition of the Senate will possibly change completely. For the past decade, the Australian Senate has been controlled by a small number of independent Senators that, in many cases depending on your view, have held the country to ransom over legislative changes or, provided much-needed balance or oversight to the legislative process.
A government calling a DD election hopes to increase its ability to pass legislation in the Senate.
The interest for YieldReport readers is what effect, if any, this will have on Australian interest rates. The RBA operates independently of government and is (or should be) politically neutral. It has historically shied away from moving interest rates during an election campaign for fear of being seen to be partisan or affecting the election result. It has, however, shifted rates during an election campaign once before and that was in 2007. It raised interest rates to an 11 year high of 6.5% and arguably damaged the then-government’s credibility on managing the economy. This created two separate narratives: that the RBA was politically motivated or the RBA was exercising its independence. The government of the day, led by John Howard, lost the subsequent election to Kevin Rudd.
The market is pricing in a 24% chance of a June rate cut and a 32% chance that the RBA will cut rates in July (the RBA meets on 5 July potentially after an election). Therefore, the possibility of an interest rate cut during the election campaign remains real.