If Michele Bullock does not learn from the two fundamental mistakes of her boss, Philip Lowe, then she is likely to run into very similar problems and will not be awarded a second term.
Philip Lowe’s first mistake is made by many leaders around the nation — not admitting error. When Lowe forecast interest rates would stay low until 2024 he then watched a lending spree erupt, partly as a result. It was time to admit error.
Yet is very hard for a corporate CEO to admit error let alone a Reserve Bank governor. Yet it can be done. The unrestrained bank mortgage lending that was later to cause the nation so much damage needed to be nipped in the bud and part of that process was for the Reserve Bank to say there were new forces emerging that required an amendment to the “low rates until 2024” forecast.
Bullock won’t make the interest forecast mistake but anyone who is making regular speeches and answering questions can make a statement that they later regret.
The second mistake is more fundamental. Both Treasury and the Reserve Bank rely on mountains of statistics to make decisions.
The Reserve Bank has many excellent analysts who are brilliant at poring through the data. If the economy is relatively stable that process works perfectly well, and the Reserve Bank board gets good advice.
But if there is turmoil with big fluctuations up or down then the official statistics can be many months old and once a new trend has been isolated it is too late to take early action.
After Easter in 2020 the Australian economy started to boom – a development few expected. The Reserve Bank had to move quickly, or the boom would quickly ignite inflation. The statistics didn’t isolate the boom until well into 2020-21.
Similarly, after Mother’s Day this year the retail sector sagged, and that information has yet to be properly reflected in the statistics although company announcements are confirming the trend. These two situations show that the days of trying to run a central bank from one city in a country as broad as Australia are over, if they ever existed.
Former Reserve Bank governors and their top people made less speeches than Philip Lowe but spent a lot less time at head office.
Governors and their senior staff were talking face to face to businesspeople and others around the nation on a regular basis.
They would have known about these two swings even more quickly than people like myself did.
It’s not going to be easy to convince Reserve Bank staff that you can’t understand what is going on in the nation “from Martin Place and the Manly/Cremorne ferries”.
Bullock will need to be very alert to what is happening on the ground because she dealing with a government in Canberra that is generating policies to boost inflation and reduce productivity via industrial relations legislation.
Only by understanding what is actually happening will the Reserve Bank be able to develop policies to counter Canberra’s potential economic carnage.
I have never been to a Reserve Bank board meeting but as I understand it the directors are bombarded with material from the Martin Place economists plus material from Treasury which operates an even more isolated system out of Canberra.
It is highly likely that in the years ahead we will have more events like those that took place in 2020 and 2023.
Treasury will always be behind, and it will get worst now that they are mostly working from home.
The nation needs a Reserve Bank that is in regular personal touch with people around our land.
Sydney is a great city, but it is not Australia nor are any of the other centres.
Our central bank needs to understand this and the departure of Philip Lowe underlines that the new Reserve Bank governor will have to change the way the central bank collects and interprets its information.
It is not going to be easy because one of Philip Lowe’s legacies was to spend $500m renovating the 1964 Reserve Bank citadel which had been riddled with asbestos. It would have made an excellent museum for Australian banking.
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