Luci Ellis’s exit from the Reserve Bank – the second of the central bank’s leadership team to leave in a little over a year – points to bigger changes that are soon coming at the top.
Early on Monday Westpac said Ellis, a career RBA staffer, was set to join the big four lender from October. This positions her to take over from legendary chief economist Bill Evans, who plans to step back this coming January.
The move is significant on several fronts. It’s a trophy hire for Westpac, which in Evans already has serious street credibility in economics forecasting. It also represents another major loss of intellectual talent for the RBA, particularly following last year’s surprise exit of deputy governor Guy Debelle who took a senior advisory role at Andrew Forrest’s green energy arm Fortescue Future Industries. And while Guy was seen as the natural successor to Lowe, Ellis was some distance behind.
However this is all becoming a moot point with the central bank now on track for one of the largest shake-ups in decades, with the announcement of a new governor to take charge from Philip Lowe due as early as this week.
My colleague Terry McCrann on Monday wrote that the Prime Minister and Treasurer will jointly announce the next governor this week instead of opting to extend Lowe’s seven-year term.
Currently, finance department head Jenny Wilkinson is widely seen as a lead contender to take charge of the central bank, with Treasury boss Stephen Kennedy’s name also in the mix. Ellis was not in the current mix of internal candidates, with deputy governor Michele Bullock leading the RBA’s own names.
Even so, Lowe had been a strong supporter of Ellis, including signing off on her promotion into the powerful economics and assistant governor role in late 2016.
And in normal times it remains a fairly uncontroversial position, but is regarded as a critical step on the path to the top job inside the bank.
Indeed, Lowe held the role before being promoted to deputy governor in 2012 and ultimately governor. Her exit will leave a substantial gap in experience.
On Monday Ellis said in a statement: “I am grateful for the opportunities I have had over my 32 years of service to the Reserve Bank but it was time for a new challenge. I’m excited about the new role and truly grateful to Westpac for putting their trust in me as Bill’s successor.”
Covid test
Like most things through the Covid pandemic, Ellis’s economics team was sorely tested. Here the RBA has come under intense criticism for missteps around its forecasting – particularly as inflation took hold as aggressively as it did.
It is important to note the RBA was not alone – few central banks in the world anticipated the inflation bubble would take hold so harmfully.
Ellis’s economics unit helped provide the quantitative reasons for the RBA’s late timing around pulling back over its massive stimulus program, while other global banks had started going hard on hikes. However, the timing of the rate hikes was ultimately the call of Lowe and the central bank’s board.
The independent review of the Reserve Bank released in April said with the benefit of hindsight the RBA had been overly focused on a view that wages growth would be needed to achieve sustainability higher inflation. The RBA review said the central bank may not have tested the prospect of upside risks to inflation stemming from supply side sources.
The RBA review concluded that the bank’s forecasting models “fell short in an environment of large and persistent supply disruptions, and when monetary and fiscal policy interactions were important”. Many other central banks had arrived at the same position, the RBA review added. Any management change at the top is likely to put the economics team under the microscope.
Lowe accepts responsibility for the inflation call and recently said he takes comfort from the fact that “errors that we’ve made are really clear in other countries as well”.
“Before the pandemic, inflation was low everywhere, not just Australia. Every country had a difficult period during the pandemic and responded really similarly with monetary policy and now every country has got high inflation.”
End of era
For Westpac the change marks the end of an era. After being named chief economist in 1991, Evans has seen through four Reserve Bank bosses and through to the end of January he is likely to count five. He is an astute watcher of the central bank and his team has been the leading forecasting unit among market economists. His interest rate calls have the power to move currency and bond markets. Last year, amid highly dispersed calls around the RBA’s expected interest rate tightening and the size of the moves, Evans’s team was getting it right. Evans now expects a peak interest rate of 4.6 per cent from the current level of 4.1 per cent. He had anticipated a hike in July (the RBA held). But now expects a hike in each of August and September.
“Our forecasts suggest progress on bringing down inflation, and evidence of some easing in labour market conditions and of an economy stagnating in the second half of 2023 will allow the (RBA) board to remain on hold after September,” Evans said in a note to Westpac clients this week.
Evans expects the cash rate to remain on hold until May next year when conditions will allow the central bank to begin easing. He also expects Australia to avoid a technical recession, although growth will stall to just 1 per cent next year.
Of course at banks the chief economist is more than just forecasting the path of interest rate moves.
A bank builds its entire modelling around the forecasts of its house economics team. This drives top level decision-making right from lending to trading funds on global markets. Bank executives rely heavily on their house economics teams to help form a more complete picture of the economy from business and consumer sentiment, to trends in property markets.
johnstone@theaustralian.com.au
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