‘Bad-news Lowe’ is getting results

Given the inflationary times and rising interest rates, attempts by government to distance itself from the Reserve Bank of Australia are understandable, but it must not get out of hand. It is one of the great benefits for government of having an independent Reserve Bank that it can kick the bank boss publicly while quietly encouraging them to go about their business. Indeed, Jim Chalmers has taken to referring routinely to the “independent RBA” when he comments on its actions.

But at the same time the federal Treasurer is reviewing the structure of the bank and the way it conducts business. And he is doing little to dampen speculation that RBA governor Philip Lowe is destined to be out of a job when his term expires this year. If that happens, it will break the usual pattern in which the term of RBA governor is extended briefly while a replacement is found. Already there is speculation that Dr Lowe’s replacement is in the sights, and deep inside the bank’s machinations. It is Carolyn Wilkins, a former deputy governor of the Bank of Canada. Professor Wilkins is working on the government-ordered review of the RBA, which Dr Chalmers has said will “renovate” the central bank.

Dr Lowe carries a lot of baggage from his repeated public pronouncements that interest rates would stay at historical lows of 0.1 per cent until 2024. Some argue he was too late in pulling the interest rate lever to counter the vast amounts of government stimulus delivered as part of the Covid-19 pandemic response. After nine consecutive rises, the cash rate target is 3.35 per cent, and Dr Lowe predicts more rises to come. The latest Westpac-Melbourne Institute Consumer Sentiment Index released on Tuesday shows that consumer sentiment has fallen back into deep pessimism and is weaker than during the global financial crisis. Among consumers with a mortgage, the sentiment index stood at 55.4, down 14.4 per cent since January – among the bleakest responses on this question in the history of the survey, which goes back to the mid-1970s.

This all shows that Dr Lowe’s medicine is working. Consumers are feeling the pinch of higher interest rates and believe the RBA when it says more are in the pipeline. Criticisms of Dr Lowe by government and speculation the government is planning to replace him are counter-productive at this point. Instead, ministers should be listening to the message Dr Lowe is sending to government. That is to tighten spending, pull back on promises of higher wages, set out a plan to return the budget to surplus, and grow the economic pie through gains in productivity.