In all the recent criticism of Philip Lowe it was a headline on the satirical website The Shovel that best captured the sentiment about recent rate rises: ‘RBA boss reassures Australians interest rate rises will stop as soon as economy collapses’.
Lowe has over the last year morphed into the political lightning rod for people struggling with cost of living as interest rates, rents, petrol prices and daily staples have risen in price.
Twelve rate rises in 13 months — to tamp down inflation and try to ensure the cost of everything starts rising at a slower rate, within 2-3 per cent band, rather than at close to 7 per cent – is now causing serious pain for households.
And people are pointing the finger of blame at Lowe, even though the central bank’s narrow remit is to focus on keeping inflation down, and the mechanism it has to achieve this is moving the central bank’s cash rate. When you’re holding a hammer, everything starts to look like a nail. Lowe has no compunctions about wielding the hammer.
The governor did make a major mistake in November 2020 by suggesting that its cash rate — which determines the commercial rates banks charge customers — would likely not shift from 0.1 per cent until 2024. Yes, the pandemic exponentially increased the degree of difficulty in making forecasts – but Australians heard Lowe’s prediction and invested accordingly.
They’re paying for it now.
Rate rises started in May 2022 and have barely stopped since. There are real world consequences to the RBA’s difficult decisions. A person or family with a $600,000 mortgage in April 2022, paying the (then) standard mortgage rate of 1.9 per cent, was paying about $2200 per month. Now, the standard mortgage rate is 5.9 per cent — which translates to about $3500 a month in mortgage payments.
'While Lowe maintains his current course, the pressure on households will mount. And Lowe would do well to remember the people his decisions are affecting.'
That’s a major financial hit for anyone on an average, or even above average wage, and that will affect about 800,000 mortgage holders this year as their low rate, fixed rate mortgage periods end (to say nothing of everyone else already on standard variable rates). Those rate rises flow through to higher rents, too.
Throw in still-high fuel prices, more expensive food and groceries, rising gas and electricity prices and annual pay rises which are growing, but aren’t keeping up with inflation, and that means pain for hundreds of thousands of households.
Lowe is correct when he argues that inflation is corrosive and that it erodes people’s standard of living — we are seeing that play out right now. As each rate rise is handed down the prospect of a recession, even if it is only a mild one, increases — the warnings from serious economists are mounting each week.
Reserve Bank governors get seven-year terms and, by convention, have been granted extensions that have taken them up to ten years when they have wanted to continue — which Lowe has indicated he would like to do.
Lowe’s term is up in September and Treasurer Jim Chalmers has indicated he will make a call on Lowe’s future by the middle of this year. That moment is fast approaching.
How Chalmers responds to the rising criticism of Lowe, not least from his own backbench, carries risks. Drawing a line under Lowe’s term this year would be popular in some quarters undoubtedly — and it could be done as part of the response to the Reserve Bank review ordered by Chalmers, which will see a separate interest-rate setting board created, a greater focus on achieving full employment and not just keeping inflation in the two to three per cent band, fewer interest rate-setting meetings each year and that the governor hold a press conference after each meeting.
The smart money is on Lowe being politely moved on. But doing this would also carry risks for Labor. The RBA’s unpopular decisions on interest rates are independent of government. If anything, having Lowe in place as head of the independent body that sets rates, that people can look to and blame is helpful. A new governor would still be focused on reducing inflation and would likely make similar, if not identical, decisions on future rate rises.
One of the single greatest risks facing this government — aside from a failed Voice referendum — is that at some point people will blame them for difficult economic circumstances. Anthony Albanese and his team have been extended a lot of latitude thus far but eventually, the federal government always carries the can.
If a replacement for Lowe was named, that person would be the governor appointed by Labor — thus reducing the perception of distance between the Reserve and the Albanese government. In other words, it might feel good to flick Phil Lowe but the policy prescription from the next governor will all but certainly be the same, anyway. And Labor would own it.
Back in 1990 Paul Keating said that Australia was experiencing the recession it had to have, for a complex series of economics reasons that had their foundation in the excesses of the 1980s. Australia in the early 2020s is facing a recession the RBA seems to believe we might need to have — despite all the talk about a ‘narrow path’ to avoid it — to get inflation under control. The human cost will be significant.
Despite his mistakes — and the very real prospect of recession — Labor might hang on to the independent Lowe, rather than move him on just as the country slips into a period of negative economic growth, so that the governor can help carry the can for the downturn.
Prime Minister Anthony Albanese pointedly made clear his personal view of Lowe's predictive powers on Friday, noting how badly wrong the governor had been when he suggested rates would not rise until to 2024 during a question-and-answer session at a conference.
In the meantime, while Lowe maintains his current course, the pressure on households will mount. And Lowe would do well to remember the people his decisions are affecting.
James Massola is National Affairs editor for The Age and the Sydney Morning Herald, based in Canberra. He has previously been South-East Asia Correspondent, based in Jakarta, and Chief Political Correspondent in Canberra. He has also worked for the Canberra Times, the Australian, the Australian Financial Review, as assistant editor of Eureka Street and is a regular commentator on ABC radio and TV. He is also the author ofThe Great Cave Rescue about the Thai boys football team.
Main image: Governor of the Reserve Bank of Australia, Philip Lowe. (Brendon Thorne / Getty Images)