Why Lowe had to go

Deputy Reserve Bank governor Michele Bullock will become governor of the RBA from September 18, Prime Minister Anthony Albanese announced this morning, making her the first female governor of Australia’s central bank. Her appointment will bring to an end Philip Lowe’s seven-year stint in the role, which has encompassed the most tumultuous economic period for Australia in recent decades.

Treasurer Jim Chalmers refused to be drawn by the media on the reasons for Lowe not being reappointed, beyond saying he believed Bullock was the best person to lead the RBA into the future — reflecting the need to implement the recommendations of the government’s Reserve Bank review released earlier this year.

The unanimous view of Lowe, across all varieties of economic thinking from inflation hawk to progressive dove, was that he made a spectacular communications blunder in constantly reassuring Australians throughout 2020 and 2021 that interest rates would be unlikely to rise before 2024 at the earliest.

Whether that mistake was enough to rule out extending his term as governor after seven years is a separate debate, but it’s the central charge against him — so the orthodoxy goes.

But Lowe’s flaws went beyond what could be characterised as a mistake born of good intentions in the midst of the unprecedented circumstances of a global pandemic, during which all manner of rule books were torn up. Things recovered much more quickly than expected — partly because of the RBA’s rapid monetary policy response, which Lowe engineered — so a change in policy was needed much more quickly. Lowe was, perhaps, a victim of his own success in responding to the pandemic.

Under his leadership, he and the RBA have been criticised for holding interest rates too high before the pandemic while inflation dragged along below the bank’s target band. Yet Lowe demonstrated some welcome willingness to break with monetary policy orthodoxy after taking over as governor in 2016, on two key issues.

As the RBA has now admitted, its wages growth forecasting for most of the past decade was badly off — it constantly predicted wages growth taking off the quarter after next, when it flatlined below 2.5% after early 2015. While the Coalition government, business and its media cheerleaders were perfectly content with wages stagnating, and perpetuated the myth that growth was just around the corner, Lowe realised persistent stagnation was a problem, began wondering why, and chose to do something about it.

He highlighted poor wages growth as a structural, not temporary, economic problem; repeatedly criticised governments for failing to encourage growth through the most direct lever they had, public sector wages; said he wanted to see pay rises above 3%; and warned that if stagnation persisted, it would undermine community support for difficult economic decisions. None of those statements pleased either business or the Coalition.

Lowe was also vocal about the need to boost the economy with looser fiscal policy, especially after the RBA began cutting interest rates in 2019 — to the fury of neoliberals and the Morrison government, which insisted to voters an economy visibly struggling with low growth was in fact “strong”, and that the budget was “back in black” after years of deficits.

However, once inflation began to rise in the wake of pandemic disruptions to supply chains, over-stimulus from governments and the Ukraine war, Lowe made a high-speed retreat into neoliberal orthodoxy. Gone was the urging for higher wages — workers should now suffer real wage cuts, he insisted, and any push for higher wages in the face of plunging spending power for households would be economically disastrous.

As wages growth belatedly crept above 3% — still far below inflation — Lowe became increasingly agitated and began warning of a wages-price spiral, straight from the 1970s economic textbooks, in defiance of all evidence.

Lowe and the RBA rapidly developed a blind spot for what other central banks such as the European Central Bank and US Federal Reserve were acknowledging: that profit-gouging by firms drove most of the inflation of 2021 and 2022, not wages.

Recent weeks have been particularly humiliating for Lowe and the RBA as the Bank of International Settlements, the International Monetary Fund — traditionally the home of hardline neoliberalism — and the OECD have all produced evidence of the significant role of profiteering in inflation globally (and, in the case of the OECD, in Australia).

Lowe’s program of constant interest rate hikes aimed at increasing unemployment, driving down wages and crimping demand was based on a falsehood — one he has constantly refused to acknowledge.

The Lowe of 2019 might have approached it differently: a more modest program of interest rate rises (rises were needed, after all, as rates were at emergency lows), jawboning of governments to tighten fiscal policy, and calling for governments to address profiteering using their available levers — just as he called for governments to use their available levers on wage stagnation and low economic growth.

That never happened.

Lowe’s arguably understandable miscommunications of 2020 and 2021, coupled with cack-handed interventions such as urging workers to take extra shifts to cope with inflation, pale into insignificance compared to his refusal to acknowledge profiteering in inflation, and his determination that it is workers who must be punished for inflation. Fairly or unfairly, that will be his legacy.

Did Philip Lowe leave a legacy to be proud of? Let us know by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.