Samantha Maiden: Has the Reserve Bank taken Australians for a ride?

Australia’s Reserve Bank Governor told Australians late last year to go out and borrow. That might have led us up the garden path, writes Samantha Maiden.

Sunrise host David Koch ripped into the Reserve Bank of Australia as “negligent” this week, asking if it was derelict in its duty for telling homeowners last year that it wouldn’t raise rates until 2024.

Homeowners know what happened next. Some of the biggest consecutive rate rises in decades.

So did the RBA dupe Australians?

“Late last year, November December, the reserve bank, Philip Lowe, was telling Aussies to go out and borrow, go out and borrow as much as you like, on the understanding. I’m not going to put up official interest rates till 2024,’’ Mr Koch said. “A couple of months later, they started putting up rates. Was that advice to average Australians negligent, were they derelict in their duty to lead average Australians up the garden path to get themselves in debt?”

Treasurer Jim Chalmers announcing the first wide-ranging review of the Reserve Bank of Australia since the 1990s. Picture: NCA NewsWire / Gary Ramage

Treasurer Jim Chalmers was polite. He insisted the major review he announced this week into the RBA, its culture and the inflation target was not about “taking potshots”. It was too polite for the Sunrise host, who pointed out that it wasn’t like the RBA wasn’t warned.

“But the reality is the market at the time, were saying to the Reserve Bank, to everyone saying inflation is roaring back, you’re going to have to put up interest rates, you’re going to have to do it quickly to get that ahead of the curve on inflation,’’ David Koch said.

“The Reserve Bank didn’t, they did the opposite. And that’s why our inflation has got a bit out of control. We’ve lagged the rest of the world. Surely, that is negligence on the part of the reserve bank?”.

So what happened? Sure, the war in Ukraine and the various supply chain issues that have arisen from the pandemic are a big factor, but did the RBA also make some mistakes that fed inflation?

Yes it did. And that’s according to reserve bank governor Phillip Lowe.

He offered a confession of sorts this week that the RBA may have “over insured” against the pandemic with low interest rates, a decision that has contributed to the inflation crisis now gripping the nation. It’s not the first time Dr Lowe has apologised.

In May, he admitted the central bank’s pandemic guidance that interest rates would not rise until at least 2024 was an “embarrassing” error and it “should have done better”. But in a mea culpa over widespread criticism that the bank had kept interest rates too low for too long, Dr Lowe said it was “a scary time” and the RBA and the Morrison government wanted to save jobs.

“Looking back at this experience with hindsight, I can understand why some people might conclude that too much support was provided by governments and by central banks,’’ he said.

“It’s really important to remember the context in which these decisions were made.

“At the time the decisions were made to provide the support, the outlook was truly dire.

“In Australia, tens of thousands of people were expected to die, our hospitals were expected to be overflowing.

“It was a really scary time. In this environment, the reserve bank, had a very strong insurance mindset.”

Governor of the Reserve Bank of Australia Philip Lowe. Picture: Louie Douvis Pool/Getty Images

Of course, it’s not a secret that lower interest rates stimulate economic growth and encourage borrowing and investing.

That’s the point.

But it’s also well known that when rates are too low, they can spur excessive growth and subsequent inflation.

“With the benefit of hindsight, it could be argued that we took out too much insurance,’’ Dr Lowe conceded.

“That’s the nature of insurance.”

“I recognise though that, while this approach helped avoid some of the damaging long term scarring, it has contributed to the inflation pressures we’re now experiencing. We’re having to respond to that now,’’ he said. “And we expect further increases will be required in the cash rate over the months ahead.”

In other words, he expects the rate rises to continue.

The ANZ predicted on Tuesday that interest rates could rise by 50 basis points in August, September, October and November.

That would leave the cash rate at 3.35 per cent. The average Sydney mortgage holder could pay another $1300 per month.

Little wonder Prime Minister Anthony Albanese insisted this was at the “pessimistic end of the forecast.”

“That would place real pressure on people,’’ he said.

“Of course, the reserve bank will make its decisions based upon their assessment of where the economy is at.

“But they need to be careful that they don’t overreach as well. They need to make sure that they get the assessment right.”

No pressure, but a clear warning from the Prime Minister to the RBA to ensure that, after failing to increase interest rates for perhaps longer than it should have, to not overcompensate.