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How to judge the success - or failure - of RBA governor Philip Lowe

The end of Philip Lowe’s tenure as RBA governor can’t come soon enough.

Pedestrians crossing a busy street, with an inset of RBA governor Philip Lowe.
Record-low unemployment is one element of ‘success’ RBA governor Philip Lowe is clinging to. (Source: Getty)

The end is near for the embattled governor of the Reserve Bank of Australia (RBA), Phillip Lowe.

It will be a momentous day when his seven-year term as governor ends in September. Treasurer Jim Chalmers is close to announcing who will succeed Lowe in one of the most prestigious and powerful economic jobs in Australia.

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It is a relatively straightforward task to assess Lowe’s performance, given the economic criteria for the central bank is, in its own words, as follows:


“In determining monetary policy, the bank has a duty to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. To achieve these statutory objectives, the bank has an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2-3 per cent, on average, over the medium term.”

In terms of the key objective - 2-3 per cent inflation - Lowe has failed.

Annual inflation has been between 2 and 3 per cent on just four occasions under this governor. That is four quarters in almost seven years.

In the period from late 2015 through to early 2021, inflation was consistently below the bottom of the target level, averaging 1.5 to 1.75 per cent. It was a period where Lowe steadfastly refused to lower interest rates to help inflation return to target, instead keeping interest rates too high for stated objectives of “leaning against” house prices and for an unspecified and frankly absurd idea that interest rate cuts would inflame financial instability.

House prices are not in the RBA’s mandate. They never have been.

During the COVID pandemic, Lowe did the obvious and right thing and eased monetary policy, given the economic effects of the lockdowns were seen to fuel deflation, a deep recession and surging unemployment. It was an obvious policy response that was being pursued around the world and there was little dissent from these moves.

As the saying goes, the drover’s dog would have implemented these policies.

In the recovery from the pandemic, when inflation was surging and unemployment was falling, Lowe ignored that news and, now quite infamously, suggested in late 2021 that the 0.1 per cent cash rate would remain in place until 2024, based on the RBA forecasts for the economy and especially inflation.

Those forecasts were horribly wrong. So too was the discussion about interest rates not being hiked until 2024.

When inflation was clearly rising in late 2021 and early 2022, Lowe judged it to be transitory. This was a mistake that unleashed inflation, which rose to a 32-year high. Had the RBA hiked when it should have - earlier and more aggressively - some of the inflation pressures would have been nipped in the bud and the dislocation that is impacting the economy in 2023 would have been less acute.

And even when the monetary policy tightening started in May 2022, the RBA lifted rates from 0.1 per cent to 0.35 per cent, a weak baby-step move when inflation was surging.

The one element of ‘success’ Lowe clings to as he defends his legacy is the stunning fall in the unemployment rate. It fell to a 48-year low of 3.4 per cent in October 2022. But even that achievement was a mistake and resulted, in part, from the RBA fuelling an overheated inflationary background where the economy ran out of workers.

The RBA did not expect the unemployment rate to fall much below 5 per cent prior to the pandemic. Indeed, its fears of wage-price pressures if the unemployment rate fell below 5 per cent was yet another misjudgement. Unemployment only fell to such a rate because near-zero interest rates were left in place for too long and as international borders meant Australia effectively ran out of workers.

Indeed, super-easy and erroneous monetary policy delivered an overheated economy, with rampant inflation and a position of overfull employment and an unsustainably low rate of unemployment.

As the economy continues to slow in 2023, edging towards the possibility of a recession, it will be shown that the unemployment rate below 4 per cent was both a fluke and was unsustainable. Lowe’s great achievement was a mistake and is unsustainable.

His legacy is not a good one. In per-capita terms, Australia is now going backwards.

Consistently missing the inflation target, overheating the economy including the labour market and, as looks likely, delivering a period of weak activity - which will cripple many businesses and undermine the prosperity and welfare of the Australian people - will be the failed legacy left by Dr Lowe.

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