Battle for the RBA’s future begins

by Rick Morton
Philip Lowe’s future as Reserve Bank governor looks in doubt – he’s short of allies as a major review looms, just months from a decision about his reappointment. By Rick Morton.

As far as apologies go, it was as heavily caveated as the statement that got Reserve Bank of Australia governor Philip Lowe into trouble in the first place.

During a remarkable appearance at senate estimates on Monday morning, Lowe delivered a mea culpa, of sorts, for remarks in February 2021 that appeared to signal to Australians that the central bank would not lift interest rates until 2024.

“Well, I’m certainly sorry if people listened to what we’d said and then acted on that, what we’d said, and now regret what they had done,” he told the senate economics committee.

“So that’s regrettable. I’m sorry that that happened.”

Of course, Lowe had never been absolute in his earlier commentary, but it was subtle. The cash rate would only be increased, he said, when inflation was sustainably in the 2-3 per cent target band and that would happen only if wages were growing materially faster than they were at the time. All things being equal, these conditions would likely be met in 2024.

Subtle.

When things get out of hand, however, the RBA has few tools in its arsenal, the most prominent one being the sledgehammer of hiking interest rates.

Not so subtle.

“I think, looking back, we would have chosen different language. You’re right, people did not hear the caveats and my language was always caveated,” Lowe told the committee.

Depending on who you ask, Lowe is either a hapless fellow who has made a series of poor decisions in a series of unfortunate circumstances or, as one senior trader told The Saturday Paper, “the worst central banker we have ever had” and the worst, currently, in the “dollar bloc”.

Having discombobulated the traders, acted too late and too timidly on rates, squeezed home owners, effectively told workers to suck it up and wear the pain of soaring costs without movement on wages, and tested the patience of economists everywhere, Lowe is in the unenviable position of having pleased nobody.

But even as Lowe’s extraordinary apology is jeered in economic circles, it has prompted some critics to come to the RBA’s defence because of what it signals: a weakness that can be exploited by others. Lowe should resign, they say, but the RBA should not become a political plaything.

With Treasurer Jim Chalmers’ review of the bank at its halfway point, and the first such process in about three decades, the battle for the future of the RBA has begun.

Some are warning of a “witch-hunt”.

“There are so many other failures that go to accountability, which I think threaten the long-run independence of the institution,” Australian economist Steven Hamilton tells The Saturday Paper.

“A series of fuck-ups by Phil and just general bad performance have led to a witch-hunt against him and the bank, which is extremely, extremely dangerous. It could threaten the whole enterprise.

“That is kind of catastrophic.”

The problem, Hamilton says, is that many critics of the RBA are coming at it from somewhere on the ideological spectrum that is the opposite of how monetary policy should be run.

“I don’t think a union leader or a business leader is better placed than an expert on monetary policy in deciding whether an interest rate increase will help the RBA better achieve its objective,” Hamilton says.

“Should we have union leaders or businesspeople on ATAGI [Australian Technical Advisory Group on Immunisation]? In that case, we recognise it is simply a question of technical expertise, with representation simply irrelevant.

“The same is true of monetary policy. That’s how other central banks in other countries are structured. As usual, Australia sees itself inexplicably as the exception here. Part of this is down to our deep-rooted anti-intellectualism.”

Even so, there is an orthodoxy built into the work of central banks the world over. It can be revealing to question some of those assumptions.

On Monday, it was Greens senator Nick McKim’s inquisition that prompted Lowe’s apology and shed light on some other apparent mysteries of the craft.

“I am glad he offered that apology, but the RBA has lost a lot of credibility and a lot of trust over the last couple of years, and it is critical that steps are taken to start to rebuild that,” McKim tells The Saturday Paper. “Independence does not and should not mean a lack of accountability. And it’s critical to differentiate between the two.

“That’s why we put in a pretty detailed submission to the review of the RBA that the government is currently running. And we made the point that the board of the RBA is nowhere near diverse enough, it is made up overwhelmingly of economists and business figures and at the moment is captured by the business community.”

Of the nine RBA board members, including Lowe as chair and Michele Bullock as deputy, seven have business or banking relationships. That’s 78 per cent of the board. Board members include deputy chair of Fortescue Metals Group Mark Barnaba, former chief executive of the Murray–Darling Basin Commission (now Murray–Darling Basin Authority) and productivity commissioner Wendy Craik, and former investment banker Carolyn Hewson.

Earlier this month the Australian Council of Trade Unions secretary Sally McManus issued a statement calling for a “comprehensive overhaul” of the bank that would include “at least one position on the board for an expert on labour markets and real-world wage setting systems”.

In its submission to the review of the bank, the ACTU notes that its “modelling and public commentary on wages had been poor”.

“Forecasting on wages growth has almost always been incorrect and the bank has frequently warned about the potential of wage rises to cause inflation, despite record low wage growth acting effectively as a brake on inflation,” it says. “Yet it has remained almost totally silent on the impact of companies making record profits off inflated prices.”

That changed on Monday, if only a little.

Lowe told the senate estimates hearing the RBA speaks to “about a hundred” businesses and business associations every month to discuss “how they are thinking about prices”.

“And most say, understandably, that they’re passing on cost increases and a few firms, a few more than used to be the case, that they’re putting up prices to kind of claw back a bit of [profit] margin,” he said.

It is this shift in business psychology, Lowe said, where businesses are more willing to put up prices over and above the cost of producing a product or delivering a service to maintain existing profit margins, that may be adding some pressure to inflation.

“Because for a decade, a businessperson couldn’t stand in the public square and say, ‘I’m going to put my prices up.’ If you did that, you’d be shouted down, it wasn’t acceptable,” he said. “And because you couldn’t put your prices up, you wouldn’t pay more in wages. So, we were in this kind of world where things were kind of very sticky.

“In today’s world, it’s now quite acceptable for businesspeople to stand in the public square and say, ‘I’m putting my prices up.’ The community don’t like it but it is more accepting. And in some cases, I think firms are taking the opportunity to put their prices up not just to cover costs but probably to have a bit more profit as well.

“So that shift in psychology is something that we’re watching carefully.”

When asked by Senator McKim if the business liaison program, a formal structure within the bank, had a worker equivalent, Lowe said it did not. “It’s harder to have a workers’ liaison program,” he said. “Which workers do you pick? We talk to the ACTU.”

McKim shot back: “Which businesses do you pick?”

“Well, we have ways of doing it,” Lowe said. “If we could think of a structured way to do a workers’ liaison program that was kind of useful, I’d be more than happy to consider that.”

Following the probing questions from the Greens, Lowe received an acidic reception from Coalition senators Matt Canavan and Gerard Rennick.

On the subject of interest rates, Rennick was direct: “Why should you keep your job?”

During a fiery exchange, Rennick called Lowe “a hypocrite” for saying it’s not the job of the RBA to subsidise government finance, while offering exceedingly cheap loans worth $188 billion to private banks to help them “support their customers and help the economy through a difficult period”.

On this front, the Liberal National Party of Queensland’s Rennick – who has repeatedly claimed Covid vaccines are not safe – and Senator McKim are on a unity ticket, hammering Lowe about a power under section 36 of the Banking Act 1959 that gives the RBA the power to stipulate how its loans to “authorised deposit-taking institutions” are used where it is “necessary and expedient to do so”.

“I’m aware of the provision,” Lowe said on Monday. “It’s a leftover provision.” McKim cut off the governor: “It’s in the act!”

“It is,” Lowe said. “But the idea that the Reserve Bank would now start directing credit policy to particular industries, that’s not our job and nor should it be.”

 

The RBA’s remit is extremely narrow but, as Steven Hamilton points out, the way it can achieve its mandate is quite “intricate and complex”.

“So, there’s just huge potential for it to fuck it all up in a range of ways,” he says.

“The RBA pretty clearly didn’t provide sufficient stimulus pre-pandemic, which meant inflation was too low and unemployment too high. It just didn’t fulfil its role. This was mainly because Phil [Lowe] was worried about house prices, not really something the RBA should be worried about. It is also pretty clear that the RBA provided too much stimulus for too long into the earlier part of this year, which let inflation pressures build.”

There is a pattern, Hamilton says, of being overly cautious even in the face of global trends. One element of heavy criticism directed at Lowe has been that his central bank took the foot off the interest rate brake too soon, before inflation was under control, with quarter-percentage-point hikes.

A very small sign that things could be correcting, however, arrived on Wednesday when the consumer price index (CPI) indicator for October was released, hitting 6.9 per cent for the year but well below the forecast 7.6 per cent. Potentially it is just a blip, especially given energy prices and rents that have soared and are among the biggest factors driving inflation.

In its financial stability review released in October, there is one graph in particular that has caught the attention of traders and market watchers: B.2. It shows that, if rates rise by 3.5 percentage points above the record low in April this year, almost 15 per cent of mortgage-holders on variable-rate home loans will be spending more money on those repayments and other essential living expenses than they have income. A further 10 per cent, approximately, would be spending between 60 and 100 per cent of their income on the same costs.

From March next year, a huge proportion of fixed-rate home loans locked in during the pandemic at 2 per cent will end, pushing borrowers on to repayments at 5 to 6 per cent as house prices fall.

Under such circumstances, Lowe may not make it until 2024, the date of his initial, bungled prediction.

“I would prefer if Phil Lowe were not the RBA governor because I think he is very bad at his job,” Hamilton says. “But there is no obvious alternative right now. He certainly shouldn’t be reappointed next year. The bank itself needs a big internal shake, a big cultural overhaul.

“The question I asked the RBA review panel was: Why did the RBA itself not relish the opportunity for it to be reviewed? Why did it resist it at every turn? That’s a sign of a very sick institution.”

In March next year, as those mortgages come off low fixed rates, that review will be handed to Jim Chalmers.


This article was first published in the print edition of The Saturday Paper on
December 3, 2022 as “Reserve Bank’s Lowe on the defensive”.

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