Treasurer Jim Chalmers needs to urgently answer the question of who will lead the Reserve Bank beyond September amid deepening unease in financial markets and fear that further interest rate increases will tip the economy into a recession.
Data on Thursday showed employment grew by 75,900 new jobs in May, prompting some economists to forecast a rate increase in July.
The RBA could easily lift rates again in August if inflation data for the second quarter released in late July brings more bad news.
RBA governor Philip Lowe’s seven-year term at the helm of the central bank ends in mid-September, but there is little expectation that he will be granted an extension after a public backlash over the rapid pace of interest rate increases since May last year.
Tensions between Lowe and Canberra have also grown, with Prime Minister Anthony Albanese choosing to openly criticise him about the bank’s shifting guidance last week.
Chalmers was also clearly dismayed by the RBA’s decisions to raise rates further at the start of this month.
Financial market participants are resigned to the fact that the RBA will soon have new leadership, but frustration is growing because of what is at stake for the economy and Chalmers’s radio silence.
Chalmers had promised to decide by mid year, but risks to the economic outlook are shifting quickly.
Worryingly, it might be that Chalmers can’t find a willing candidate to replace Lowe.
The next governor will face intense media scrutiny, especially if the economy goes into a recession that brings higher unemployment, mortgage defaults and business failures. If inflation stays high, the cash rate will rise toward 5 per cent.
Lowe has been cast as public enemy No.1, as higher interest rates have added thousands to mortgage costs. He has received physical threats, while the media has routinely stalked his family.
For anybody looking to apply for the job, there is a toxic mix of public anger and open hostility from Canberra waiting for them.
Finance Department secretary Jenny Wilkinson is considered the leading candidate, with Chalmers hoping an RBA outsider will shake up debate at the central bank. But she is also viewed as a strong candidate to be the next Treasury secretary, a position arguably more important to shaping Australia’s future.
Wilkinson is also married to economist David Gruen, the country’s chief statistician, so it might be hard to coax the highly respected power couple away from Canberra.
Former RBA deputy governor Guy Debelle would be a popular choice with markets. But he is reportedly enjoying his new role in the green-energy sector and might recoil if Chalmers calls and offers him the hot seat at the central bank.
Carolyn Wilkins, a former senior deputy governor at the Bank of Canada, was also considered a frontrunner, but she has since made it clear she has no interest in taking the job.
Internally, current deputy governor Michele Bullock would be an excellent choice, but she has been in her role for a little over a year. She may not fit in with Chalmers’s need for somebody to jolt the bank’s culture.
A wildcard would be to reappoint Lowe. Mistakes have been made on his watch, but in fairness to him, he was dealing with the wildest economic gyrations witnessed in a century.
He is a great economist and has what is needed to ignore the howling that will surely come if interest rates rise further.
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