RBA’s governor Philip Lowe is the best option to lead the central bank

Philip Lowe’s current seven-year term as RBA governor ends mid September. Picture: Bloomberg

Even as heated criticism from investors, economists and the political class continues to be heaped on the Reserve Bank for its recent errors in forecasting inflation, its current governor, Philip Lowe, is likely the best choice to steer policy making.

Lowe’s current seven-year term as governor ends mid September, and Jim Chalmers will ­decide who will next run the RBA within months.

RBA outsiders, including foreign central bank officials, will almost certainly be considered for the job, but with global money market investors looking for certainty amid the highest inflation in more than 30 years, it might be prudent for the Treasurer to keep Lowe at the helm.

A career central banker who has enjoyed a stellar career, Lowe has demonstrated that his top priority at the RBA is to lower inflation in Australia with a blistering pace of rate increases in the past year.

The RBA had been under siege from critics for being slow to respond to a surge in inflation, after earlier publishing policy guidance that interest rates could remain at emergency lows for up to three years.

That benign policy outlook was quickly junked when prices jumped early last year (blame the post-pandemic surge and the war in Ukraine), forcing the RBA to raise interest rates at a record pace. At its first policy meeting this year on Tuesday, the RBA announced its ninth consecutive rate increase and signalled that more were coming.

The radical shift in policy settings last year and impact on Australians in terms of higher borrowing costs and a surge in mortgages has fostered some animosity towards the RBA. Calls for Lowe to resign are now commonplace. So far, he’s rejected all of them. Even Chalmers has fallen short in rushing to endorse Lowe, telling reporters this week that “all options are on the table” with regard to the RBA’s future leadership.

What’s been lost in the uproar surrounding the central bank, which operates independently of the government, is the simple fact that forecasting the economy amid the biggest global health and economic shock in a century is like trying to land a passenger jet in a blizzard without a rudder.

While Lowe would be the last to make excuses for the RBA being late to start raising interest rates, it is clear policymakers are operating in what amounts to an alternative universe where forecasting models don’t work.

Calls for Lowe to be marched out of his job seem irresponsible given what’s at stake for the economy. If investors perceive the RBA’s resolve to fight inflation has softened, they would factor in a surge in price pressures and probably drive bond yields sharply higher. That could leave Australia’s economy lagging as the rest of the world recovers and could mean that even bigger RBA rate rises will be needed later on.

With little evidence of inflation peaking in recent data, the RBA’s move this week to sweep away all talk of a pause in rate rises was a strong move. Lowe kept investors anticipating more increases rather than potentially whipsawing markets by teasing a pause and then being forced to lift rates anyway.

If Chalmers chooses to bring in an outsider to run the RBA, it might at first glance seem like a visionary change for a central bank in need of reform. But he may also look to be surrendering to political pressure, with the government seeking somebody who might be gentler in applying the policy brakes.

But more to the point, changing leadership at the RBA for an unknown quantity in the middle of an economic maelstrom would be incredibly risky.

Dow Jones newswires