But there is much more to governor Lowe’s legacy than that. His seven-year term started off quietly. In fact, he made no changes to interest rates for his first 32 months. But the period from the pandemic more than made up for it with extremes in economic indicators resulting in high drama around the RBA. And while this brought big challenges, on balance he handled them well to the benefit of the Australian economy and people.
This is not to say he did not make mistakes.
First, he was slow to recognise the extent of the disinflationary pressures over the period from 2016 into 2019. This saw inflation chronically below target and interest rates too high for too long.
Second, the RBA (and the government) arguably overstimulated the economy in the pandemic with near zero interest rates, money printing, and ultra dovish interest rate guidance. This contributed to the surge in inflation.
Third, I fear the RBA may have raised rates too quickly since May last year, risking a recession we don’t have to have. The jury is still out on this, and it will be an issue for new governor Michele Bullock but at least she may be able to deliver good news on interest rates.
In terms of the first mistake, in the RBA’s defence, it may be argued that: in 2016 and 2017, home prices were booming; fiscal policy was pulling the other way with austerity; and many other countries were facing worse disinflationary pressures.
The pandemic was far more challenging though. In hindsight, the RBA went too far and the guidance that “a hike is unlikely before 2024” was extreme. At the time, I thought the guidance was going too far but of course some media ran with it and turned it into a “commitment” or “promise” that it never was. But there is also a danger here in being overly critical as we only know it was all too much in hindsight. At the time, there was talk of depression, double digit unemployment, and deflation. So, it’s understandable why the RBA responded so aggressively. And this played a role in minimising the damage to the economy.
But let’s look at the RBA’s objectives. On this front, governor Lowe has seen higher inflation through his term (3 per cent p.a.) than his previous two predecessors (both around 2.5 per cent p.a.) but it’s still consistent with the target. But on unemployment, its averaged far better at 5.1 per cent through his term and 3.7 per cent at the end of it. This is a key positive. But there are other positives from Lowe’s legacy.
First, he has taken the RBA further down the path of transparency. This is good in explaining why the RBA is doing things. It can be a double-edged sword though in confusing the public, damaging the RBA’s reputation and making it slower to change tack when needed. This is something the RBA Review has glossed over in pushing the RBA even further down this path.
Second, while he made mistakes in overstimulating the economy in 2020 and 2021, he was well meaning as he was trying to do all he could to help the economy in a time of extreme uncertainty.
Third, he has been more conscious of the link between monetary policy and financial stability, which contributed to the use of prudential controls to cool the property market.
Fourth, he has not shied away from delivering tough messages – around the need for more infrastructure spending, the need to lift productivity growth, and the importance of having monetary and fiscal policy aligned. Sometimes governments listened but much of the time, politics got in the way.
Finally, he has left little doubt that the RBA is serious about getting inflation down, but he has tightened in a more balanced way than many comparable central banks, where policy rates are 5 per cent plus, trying to preserve as much of the gains in employment as possible.
While governor Lowe made some mistakes, so did many other policymakers through what were extraordinary times. And his mistakes were greatly overshadowed by his contribution to helping the Australian economy recover from the pandemic, his contribution to the near 50-year low in unemployment and his decisive response to the inflation problem.
And he has done all of this with utmost commitment, integrity, and patience with the long-term interests of Australians at heart and a glass half full perspective.
Shane Oliver, head of investment strategy and chief economist, AMP
