INSIGHTS

The recent news cycle has been dominated by talk about our new Prime Minister, Chris Hipkins, and what he might mean for the country as well as Labour’s re-election chances.

In contrast, the reaction from financial markets has been muted since news broke of the change in leadership.

That's not surprising.

The country is grappling with bigger issues at the moment and any market reaction to a shifting balance of power might come closer to October.

The odds had already moved in favour of a change of government, helped by cost of living pressures, sharply higher interest rates and the prospect of recession.

Without Jacinda Ardern at the helm, National’s chances have seemingly improved further. Australia’s Betfair is paying $1.40 for a National victory, while Labour is a rank outsider at $3.20.

However, a lot could happen in the next eight months and the election could still be a closer contest than many expect.

Fresh leadership is likely to see Labour get an initial bump in the polls, and if Hipkins takes the opportunity to water down or drop a few controversial policies, that will provide an added boost.

He is a more experienced politician than his opposition counterpart, and the debates we'll see later in the year won’t be a walk in the park for Chris Luxon.

However, the path of inflation and interest rates in the coming months could have the most significant bearing on the mood of the electorate on polling day.

If inflation remains stubbornly high and the Official Cash Rate increases from current levels, the housing market will remain under pressure and unemployment is likely to rise.

That’ll hit people in the pocket even more than it already has, adding to the angst against the incumbent regime.

This could leave the Minister of Finance between a rock and a hard place, as further support becomes more difficult to offer at a time when the tax take is under pressure and the risk of fuelling inflation further is elevated.

In contrast, if inflation falls faster than expected and the Reserve Bank hits pause sooner than expected, the economy could stabilise and we might avoid recession after all.

Throw in a Chinese recovery and a robust outlook in Australia (our two biggest trading partners) and things might not be as bad as feared by September.

That could swing public opinion back toward the Government, ensuring a tight election day race.

In the MMP era, no government has been in power for less than three terms, or nine years. A loss in 2023 would mean this incarnation of the Labour party is the first since the 1980s to exit so early.

The leadership change is an important development, but it’s not necessarily a game changer.

As Bill Clinton’s campaign manager famously noted in 1992, it's "the economy, stupid".

That’s what matters most to financial markets, and Hipkins’ chances of success might hinge on it too.