Philip Lowe’s challenge to politicians in his parting speech as RBA governor

Departing Reserve Bank governor Philip Lowe Picture: Martin Ollman

As if the Reserve Bank hasn’t a hard enough job to walk the narrow path of winding back inflation without causing a large rise in ­unemployment.

Yet in his final appearance before politicians in Canberra recently, departing governor Philip Lowe spent more than the usual allotted time lamenting the unequal effects that the tightening of monetary policy was having on households.

The release of the minutes of the August Reserve Bank board meeting also reflected this, noting “consumption outcomes for some mortgagors and renters were judged likely to be considerably weaker than the aggregate, since some of these households face acute financial challenges”.

Younger demographics, which now account for almost as large a proportion of the population as older generations, are bearing a disproportionate slice of this fin­ancial squeeze from cost-of-living pressures and higher interest rates. In contrast, many Baby Boomers and more gen Xers are benefiting from higher rates on their savings and rising wealth.

Lowe mused whether there were “alternative institutional ­arrangements” that could facilitate governments having a greater role in managing the economy and inflation.

In fact, governments are currently making a larger direct contribution to slowing household incomes and therefore consumer spending than monetary policy. The combination of increased tax payments and reduced social benefit payments to households has reduced household incomes by more than twice as much as has the increase in net interest payments.

Low unemployment, rising nominal wage rises and tax bracket creep have automatically increased government revenue and reduced spending growth, while increased interest incomes for those households with little or no debt and robust savings have partly offset the large rise in household interest payments.

Recent official data also showed that while the increase in mortgage payments added about 3½ percentage points to the increase in cost of living for employees over the past 12 months, this was only about half the increase due to broader cost-of-living rises. For other household groups, including recipients of government payments, the contribution from higher mortgage payments was considerably lower.

Monetary policy of course works through other channels, including through the exchange rate, but since the start of the RBA’s tightening the exchange rate has in net terms been little changed.

All of this is not to say that rate rises are not working to cool inflation. There are lags in the transmission to the economy, including due to the staggered reset of fixed-rate mortgages, and it is only since around mid year that monetary policy has shifted into the restrictive zone. Some sectors have felt the pain much faster, while others not much at all.

Regardless of how well co-ordinated are the various arms of government policy and the RBA, the elephant in the room is the ability to forecast emerging trends in the economy and shifting risks. At least in the case of fiscal policy, there is the automatic response of the government’s budget to swings in the economy, though by itself this won’t be enough to manage large shocks.

A key reason why there has been so much popular media criticism of the RBA, and sadly the governor personally, has been that the belated recognition of significant inflation pressures by most central banks forced them to tighten abruptly. This delivered historically large rate rises over a short time frame, and contrary to varying degrees of guidance.

For households inadequately prepared for such a shift, this has been a huge financial and emotional shock. But cost-of-living pressures are beginning to ease and this means further rate rises are less likely. But equally, the RBA is a long way from contemplating rate cuts. This means that the economic and political focus will increasingly shift to the other element of the narrow path: the emerging rise in unemployment.

Paul Brennan is the chief economist at Suncorp