Dangerous forces are cornering RBA governor Philip Lowe

Philip Lowe, governor of the Reserve Bank of Australia.

Australia’s Reserve Bank governor Philip Lowe is cornered. That means we are also cornered and facing a national dilemma that I have not seen since the Whitlam years.

The first step in solving any problem is to actually recognise it. So today’s commentary is about explaining the complexity of the problems that have our Reserve Bank governor cornered. And in coming weeks, with the help of my wonderful readers, I think we can show him paths out of the corner, albeit difficult ones.

Lowe and his Reserve Bank directors are engaged in a conventional central bank style solution to galloping, out of control inflation. You raise interest rates to bring on a significant downturn so enterprises can’t raise prices and wage earners can’t demand remuneration increases without more efficiency or they will lose their jobs. It’s painful but it usually works.

The official figures that are coming into the Reserve Bank’s Martin Place bunker show that the economy is holding up remarkably well albeit slowing, but inflation remains still out of control. In that situation the markets require further interest rate rises because the “medicine” has not yet been strong enough. And if Lowe doesn’t increase rates then the Australian dollar will fall further. It’s already declined this year from around US71c to around US65c, partly because the US is engaged in a similar process and is lifting rates to administer its own anti-inflation medicine.

A weaker dollar lifts the price of imports, further locking in inflation.

In the spotlight: Philip Lowe, governor of the Reserve Bank of Australia. Picture: Brent Lewin/Bloomberg via Getty Images

So in simple “central bank” terms if the Reserve Bank doesn’t keep raising rates it deepens the inflationary mess via a lower dollar.

But as we all know the information in the Martin Place bunker is out of date. That’s why yesterday’s commentary [Get out of the bunker, the dam has already burst] was so important, because it showed that suddenly, in the last two weeks, there has been a sharp fall in big segments of the retail industry. And I am learning that the decline is spreading to other areas, including the parts of the Airbnb sector.

Australia has a unique problem in that our banks went on a dwelling lending spree — and because so much of the lending was on fixed low rates that are now converting to high interest rates, the impact of the Reserve Bank interest rate rises was delayed. But they are now hitting the economy hard. That information will take at least a month and probably two to reach the official figures, so Lowe is under currency market pressure to continue lifting interest rates.

But he is also cornered by other very dangerous situations. A year ago we elected a government that has absolutely no idea about the links between productivity, inflation and interest rates. It happily introduced its first industrial relations package without any meaningful consultation, not realising it was a cocktail that would lower national productivity and keep inflation high irrespective of what Reserve Bank might do.

The new government didn’t make a strong stand in the Fair Work wage hearings. Now there is a second industrial relations package which is even more disastrous than the first in reducing productivity and boosting inflation, because it will create a union-corporate system to reduce competition and throw legal genuine contracts into chaos. At the same time the government is spraying money around the economy and, as was pointed out by many commentators around budget time, has its foot on the accelerator while the Reserve Bank has its foot on the brake.

RBA Governor Philip Lowe appears at the Economics Legislation Committee Senate Estimates at Parliament House in Canberra. Picture: NCA NewsWire / Martin Ollman

Lowe now understands that escalating rents are emerging as one of his most serious inflationary forces and there is no hope in sight of stabilising those rent increases because state governments and local councils have policies designed to push up the cost of houses. And the banks forced on the building industry fixed price contracts which are destroying the capacity of the industry at a huge rate, by sending builders broke and causing would-be home buyers not to order new houses, fearing their builder will collapse midway through the building of their house.

As well as pushing up the cost of houses and apartments, governments in states like Queensland and Victoria have actively discouraged people from buying dwellings to rent by giving tenants far too much power. Regularly the Greens get enormous publicity every time they mention that there should be a freeze on rents and negative gearing should be abandoned, which further discourages people from buying dwellings to rent. At the same time as constricting the supply of rental accommodation, we are bringing in vast numbers of new migrants.

What’s happening is that throughout the community there are a series of agendas being embraced by governments councils and banks that have the side effect of boosting inflation and putting Reserve Bank governor Philip Lowe into what looks like an almost impossible corner.

But again, once you isolate the problems, solutions start coming forward. But the nation will need some help from the crossbenchers in the Senate to make sure the disastrous industrial relations second package doesn’t pass the parliament.