Ousting of Lowe will raise questions about RBA independence

There will be anxieties about the next person to take the seat, and their willingness to push back on pressure from Canberra.

SYDNEY – NCA Newswire, Wednesday 07th June 2023 – Governor Philip Lowe addresses the Morgan Stanley Australia Summit held at the Four Seasons Hotel in Sydney. Picture: NCA NewsWire / Christian Gilles

Reserve Bank of Australia Governor Philip Lowe looks likely to be unceremoniously removed from his job next month amid a new and worrying era of political pressure being exerted on the setting of interest rates, and growing doubts about the cherished independence of the central bank in the future.

Treasurer Jim Chalmers said this week he will appoint the next governor in July, with the announcement coming just ahead of a list of potential candidates for the RBA’s top job leaked to national newspapers.

Those listed include Canberra-based boffins such as Treasury Secretary Steven Kennedy, the Secretary of the Department of Finance Jenny Wilkinson and Chief Statistician David Gruen.

The task of appointing a new RBA governor has never been placed so highly in the public consciousness, or handled with such a clear disregard for the person currently in the job.

Public dissatisfaction with Dr Lowe’s performance has grown with each of the 12 interest-rate increases announced by the RBA board since May last year.

So acute was the inflation problem that emerged in early 2022, Dr Lowe has announced a record 400-basis-point increase in the official cash rate in response, and has left the door ajar to hike further in coming months if needed.

Higher interest rates haven’t been welcomed by the country’s mortgage belt suburbs, which carry one the highest debt burdens in the world. Occurring in tandem with the biggest surge in living costs in over 30 years, the rise in interest rates has seen Dr Lowe has been cast as the villain.

The situation hasn’t been missed in Canberra, with Prime Minister Anthony Albanese moved recently to openly criticise Dr Lowe and the sometimes violent shifts in the RBA’s policy guidance.

Albanese’s comments reflect the intensifying political sensitivities of the situation, and show how a longstanding convention that Canberra respect the central bank’s policymaking independence is coming under increased threat.

Those comments followed reports that Dr Lowe had in recent weeks been confronted by parliamentarians about the pace of interest-rate increases and angrily challenged about his calls for wage restraint to help cool inflation.

All this has generated daily headlines attacking Dr Lowe, attacks that have included anonymous death threats.

Lost on most is the fact that current inflation pressures are global, and have been stoked by the war in Ukraine and disruptions to global supply chains. The mountain of fiscal and monetary policy stimulus announced internationally to combat the Covid-19 pandemic is also at the centre of things.

In moving to tame inflation, the RBA has actually been more cautious than many of its global peers, and has stopped well short of things like deliberately engineering a recession like the one now evident in New Zealand.

If Dr Lowe is being shown the door because rising interest rates are unnerving the electorate, there are questions to ask about the next person to take the seat, and their willingness to push back on pressure from Canberra, as Dr Lowe has done.

For the global investment community that looks in on Australia, the answer to those questions will be critical.

Any whiff of lost RBA independence will immediately raise red flags on Wall Street and beyond, stifling inward investment flows and greatly raising risks that inflation becomes entrenched, making the recession now on the horizon far more destructive.

Much is at stake for Australia, with major central banks raising interest rates further this week or, in the case of the US Federal Reserve, making it clear they intend to do so in coming months.

Australia will be swept along in this current, and the RBA must be free of interference as it does,

Dr Lowe is a gifted economist and thought leader who helped lead the response to the Covid-19 pandemic, with Australia emerging with a 50-year low in unemployment.

To dispel any concerns in the international investment community that the RBA’s independence is being eroded, Dr Lowe’s term as governor, which concludes in mid-September, should be extended.

Dow Jones newswires