RBA shake-up as Jim Chalmers nears Philip Lowe decision

The Reserve Bank is on track for a shake-up, with the announcement of a new governor as early as this week.

RBA governor Philip Lowe. Picture: NCA NewsWire / Christian Gilles

The Reserve Bank is on track for one of the largest shake-ups in decades, with the announcement of a new governor to take charge from Philip Lowe as early as this week.

On Monday, the RBA’s top economics official, Luci Ellis, quit for a role heading up Westpac’s economics team, replacing the banking major’s veteran economist Bill Evans.

The departure of the RBA’s assistant governor comes with Jim Chalmers under pressure from his party to not extend Dr Lowe’s seven-year term when it ends in September. Current finance department head Jenny Wilkinson is widely seen as a lead contender to take charge of the central bank.

The Treasurer will make an announcement on the RBA leadership in coming days, with Treasury boss Stephen Kennedy also seen as a contender and deputy governor Michele Bullock leading the central bank’s own names.

Ms Ellis’s departure marks the second exit of a senior official from the bank in just over a year. Last March, Guy Debelle left the central bank for Fortescue, putting a hole in RBA succession planning.

A decision to appoint a successor to Dr Lowe will mean that in less than 18 months, more than a century of central banking experience will have left the RBA, with ongoing inflationary pressures locking in the prospect of a recession as interest rates are forced even higher.

Mr Evans told The Australian he expected the RBA to deliver two more interest rate hikes to get inflation back to target levels within a reasonable timeframe, most likely in August and September, but thought the economy would avoid a recession despite slow growth ahead.

Mr Evans will hand over the reins to Ms Ellis in October. He will return as Westpac’s senior economic adviser in January 2024.

Mr Evans said recent changes in RBA thinking – from wanting to keep the economy on an “even keel” while lowering inflation to worrying about the risk of inflation becoming embedded in the system, and having to accept that economic growth and employment needed to pay a price for ensuring that inflation pressures were contained – meant “they have to go a couple more times”.

“We originally thought that the peak in the cash rate would be in May, at 3.85 per cent, but I think with this big change in approach, it’s going to have to go higher.”

The cash rate is now at 4.1 per cent and widely expected to hit 4.6 per cent by May, with some calling for a move to 4.85 per cent.

Last September, Mr Evans said the RBA needed to “strengthen the rhetoric” on inflation to head off a potential prices-wages spiral as demand was running well above supply after the pandemic.

He predicted that the RBA would hike by 50 basis points last October. Instead it switched to 25-basis-point rate hikes.

Since then it has started hiking rates twice a quarter.

Even after delivering a four-percentage-point rise in interest rates since May 2022, the RBA says some further tightening of monetary policy may be needed to ensure that inflation returns to target in a reasonable timeframe.

In coming months, the bank is due to implement recommendations of the RBA review, including appointment of a separate monetary policy board, a shift to six-weekly board meetings, and a more rigorous focus on achieving the mid-point of its 2-3 per cent target band.

In September, Mr Evans told The Australian that the RBA needed to “strengthen the rhetoric” on inflation in order to head off a potential prices-wages spiral, as demand was running well above supply after the pandemic.

After he called on the RBA to hike by 50 basis points last October after a strong inflation report, the bank instead switched gears to 25-basis-point rate hikes. “That would have been the right policy, in retrospect,” Mr Evans said. “The taper was a bit early and they were stuck chasing their tail a bit.”