Lowe can’t survive but the RBA must

Reserve Bank governor Philip Lowe is in deep, almost certainly terminal, trouble.

Furthermore, the RBA as an institution is about to join the 21st century: it is about to undergo the sort of fundamental ‘disruption’ that has roiled every – and I mean every – aspect of life for everyone else.

No-one though should take any either schadenfreudian pleasure or more prosaic comfort in these outcomes. For, as a consequence, we will be entering very – and I mean very – dangerous times.

I agree with my colleague, The Australian’s Eric Johnston’s judgment, that Lowe’s fate was probably sealed by his catastrophic misjudgment – my words not Eric’s – in briefing a private investment banking lunch last week.

It was not just that Lowe opted to do that instead of what had become his regular public speech – and publicly taking and answering questions – to open the year.

It was that he chose to do it ahead of his two appearances before the backbench pollies – from the Senate and the Reps – this week. What, did he really expect that would win him a standing ovation from the always publicity-seeking entirely-populist backbenchers? Thank you governor, for speaking to the wicked money-lenders, before us? It’s not exactly as if he – and the RBA, board and management – were being wafted ever higher on the winds of appreciation and applause from across the community, before this ‘unfortunate’ two weeks in February. Bluntly, he had been skating on increasingly thin ice for months now; I think he just went through.

RBA governor Philip Lowe is under pressure. Picture: Brendon Thorne/Bloomberg

It would have been difficult for any treasurer to reappoint him to a new term when his current one expires in September; we’ll just ‘look past’ that, ahem, ‘the promise’. It would have been even more difficult for a newbie Labor treasurer to reappoint him, given the political pain he is delivering with his interest rate hikes - fundamentally necessary and appropriate as they are.

This is made even more pointed by the review into the entirety of the RBA and monetary policy, initiated by this very same treasurer and due to report at the end of next month. Re-appointment would require the treasurer to essentially reject the review and opt to stick with the status quo. Somewhat unlikely, I would suggest. But what’s coming – The first RBA head from outside the bank since Bernie Fraser in 1989, who, a tad ironically, gave us the monetary policy framework and execution that ruled so successfully for the next near-30 years; a likely whole ‘new RBA’ more broadly; and maybe a whole ‘new monetary policy’ – will take us into uncharted, turbulent and highly dangerous waters. Furthermore, it will be happening at an extraordinarily acute point in time.

Again, it’s not just when the RBA is embarked on – so far, half –punishing, but absolutely necessary rate hikes; and when that job is barely half-done.

But further, it will be doing so, in extraordinarily febrile global contexts and dynamics.

We do not want a ‘new’, far less a ‘woke’, RBA to back off too early – the monetary equivalent of someone stopping their anti-biotic regime early because they ‘feel better’.

Far less, such an RBA to embrace touchy-feely, ‘less painful’, more ‘directed’, supposedly anti-inflation measures. That way heads for South America, if not specifically Venezuela.

There are two major lessons to draw from the last three years, and neither of them is that interest rates are some sort of inappropriate ‘blunt instrument’, or that they unfairly and inefficiently target borrowers with home loans.

The first is that abnormal monetary policy – cutting rates to zero and printing money – was not a sensible or effective response to the extreme execution of policy through Covid; the ordering of the economy’s closure.

The second is precisely the urgency of getting it back to some level of normality.