Philip Lowe is in many ways an unlikely steward of a Reserve Bank that’s increasingly reviled for inflicting economic hardship. By Dennis Glover.

What drives Philip Lowe?

RBA governor Philip Lowe at Parliament House earlier this year.
RBA governor Philip Lowe at Parliament House earlier this year.
Credit: AAP Image / Lukas Coch

Midway through the third episode of the new BBC drama This England, British Prime Minister Boris Johnson, played by Kenneth Branagh, is briefed on the cost of locking down Britain during the Covid-19 pandemic. His facial expression tells you what he’s likely thinking: this can only end badly for me.

What about here in Australia? Which economic decision-makers are under pressure from the economic chaos unleashed by the pandemic and now the war in Ukraine?

Being brand new to their jobs, Treasurer Jim Chalmers and Finance Minister Katy Gallagher can expect to escape the blame for now. So too the low-profile Treasury secretary Steven Kennedy, one of the architects of the popular and successful JobKeeper program. That leaves the Governor of the Reserve Bank of Australia, Philip Lowe, whose first seven-year term ends next year.

Who would want to be in Lowe’s shoes, after monetary policy has swung from being one of the good cops during the pandemic to being very definitely the bad cop, with six straight interest rate rises? Coming from 0.1 per cent in early May, the cash rate is now 2.6 per cent, and the average monthly housing mortgage repayment for a loan of $500,000 has increased by around $700.

To add to Lowe’s troubles, Chalmers has commissioned a review of the RBA, which could be interpreted as an implied criticism of the bank’s performance in recent years. Some economists are suggesting behind the scenes that the review provides the government with a convenient opportunity to appoint a new governor with a fresh mandate for change. Labor, they say, would be crazy not to take advantage of it.

Lowe’s position hasn’t been helped by the RBA’s oft-stated forecast that it didn’t expect rates to rise above 0.1 per cent until 2024.

In early September, the Greens’ economic spokesperson, Senator Nick McKim, controversially called for Lowe to resign, arguing that his 2024 forecast encouraged people into taking out mortgages many now cannot afford. McKim said that “Australians are entitled to believe someone in the incredibly powerful and … well-paid position that Dr Lowe occupies. We can’t allow the independence of the Reserve Bank to be mistaken for a lack of accountability.”

McKim hasn’t been alone in his criticisms. The ABC’s finance commentator, Alan Kohler, has publicly questioned whether Lowe deserves to have his term extended, should he choose to stay on. Writing in The New Daily in July, Kohler said it was time an outside and preferably overseas appointment was considered. He even suggested that borrowers who took out loans after Lowe’s 2024 forward guidance probably have the basis for a class action.

A former senior Coalition economics adviser I spoke to lamented Lowe’s interest rate prediction, calling it a big call to make so far out. In his opinion the current RBA board allowed monetary policy to become too loose in its pursuit of full employment and rising wages and should have stuck to the mandate successive governments had given it of keeping inflation under tighter control. Lowe, he says, now has the worst of both worlds – rising inflation and falling real wages.

The executive director of The Australia Institute, Richard Denniss, criticises Lowe from the opposite standpoint. In Denniss’s view, when inflation was below the bank’s target band of 2-3 per cent, Lowe left interest rates high and unchanged longer than just about any other central banker in the world – but when inflation rose above the target, he hiked interest rates faster than just about any other central banker in the world. “Why the asymmetrical approach?” Denniss asks. “Why abandon full employment and rising wages so readily?”

Denniss’s answer is that, judged by his deeds rather than his words, Lowe has proved to be “the perfect neoliberal RBA governor” whose overriding concern is maintaining the share of the economy going to profits. This, he says, has cost Australian workers billions of dollars.

In June, Lowe said that while inflation was forecast to increase to 7 per cent by the end of this year, wage growth should be kept to 3.5 per cent to prevent a wage-price spiral that could lead only to rapidly rising unemployment.

As Sally McManus, secretary of the Australian Council of Trade Unions, pointed out after Lowe’s speech, this represents a real wage cut. She accused Lowe and the bank of being “stuck in boomer fantasy land”, adding that, as a result of the RBA’s policies, “big businesses are pocketing record profits, while passing on price rises to consumers and refusing to grant real wage rises for workers”.

Clearly, much progressive economic opinion is unhappy with Lowe’s performance. Lowe, though, is in some ways an unlikely figure to be cast in the role of capitalist robber baron. He attended Catholic high school in Wagga Wagga, joined the RBA at 17 and earned his first degree via evening study at the University of New South Wales. His Massachusetts Institute of Technology PhD was supervised by one of the giants of left-wing economics, Paul Krugman. His career has been one of dedicated public service inside the global financial structures created to prevent a repeat of the economic catastrophes of the 1930s and 1940s.

Lateral Economics’ chief executive Nicholas Gruen points out that Lowe’s background puts him in the great tradition of Reserve Bank governors and Treasury secretaries who often emerge, like Roman senators, from sheep farms, country towns and high schools to serve the nation.

His lack of airs and graces makes him popular with progressive economists of his own generation. John Edwards, an old colleague of Lowe on the RBA board and a former senior Labor economics adviser, is a big fan, describing Lowe as a fluent explainer of economic circumstance, possessing none of the self-importance that can sometimes go with the role.

The man who appointed Lowe as deputy governor of the Reserve Bank board in 2012, former Labor treasurer Wayne Swan, sees Lowe as a good listener with egalitarian instincts, not your typically remote central banker.

Swan considers Lowe to be “the first openly Keynesian Reserve Bank governor for some time” for his consistent support for rising wages. His determination to keep rates low to achieve full employment and drive up wages was only undone, Swan laments, by the unforeseeable catastrophe of the war in Ukraine.

What of the future of our central bank? Some economists would like to see Lowe or his successor take the Reserve in new directions.

Denniss wants the bank to lose its narrow obsession with keeping inflation in an arbitrary band and to take seriously its legislated goals of contributing to currency stability, full employment and the economic prosperity and welfare of the Australian people. For this to happen, the composition of the board would likely have to change, with fewer businesspeople and more representatives from unions and the community.

Nicholas Gruen would like to see the RBA become more like the Bank of England, especially while Andy Haldane was its chief economist, using its independence and considerable research and advocacy capacity to explore emerging issues shaping the nation’s economic future, including exposing the eye-watering implicit subsidies to banks from being too big to fail.

So what’s the verdict on Lowe’s governorship?

He has made forecasting mistakes, certainly. But given the difficulty in making economic predictions, fair-minded people might cut him some slack.

Has he been a poor communicator? Maybe, although closer reading reveals that his November 2021 forward guidance was significantly hedged, if oft repeated. Sometimes it’s incumbent on us to read the fine print.

Might his aggressive anti-inflationary strategy result in real wage reductions? It already has. But history shows that, regardless of its cause, rapid inflation seldom does anyone any good, including members of unions.

Is he already yesterday’s man – or is he someone who can take the central bank in the sort of fresh new directions the current review may recommend? That depends on what changes the review proposes, if any.

In a time of global economic turmoil, are we happy with a solid public servant from a country high school, whose sympathies for low-wage Australians seem genuine and whose good intentions are likely better than most – or do we want someone offering a more exciting, populist and maybe risky way forward? These questions are ones for the new Labor government to answer.

This article was first published in the print edition of The Saturday Paper on October 22, 2022 as "Lowe and behold".

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