Take high road on reform, says outgoing RBA governor Philip Lowe

RBA governor Philip Lowe has urged the government to put in place a ‘credible’ plan to bring the budget back onto a sustainable footing.

Reserve Bank governor Philip Lowe in his final speech has urged the government to put in place a “credible” plan to bring the budget back onto a sustainable footing, as he lashed politicians for lacking the will to lift Australia’s dismal productivity performance.

Dr Lowe also defended the RBA’s extraordinary stimulus measures during the Covid-19 health crisis, saying they had prevented the economy from “falling into the abyss”, although he admitted “with the benefit of hindsight, my view is that we did do too much”.

Having been pilloried for delivering a dozen rate hikes in a little over a year, and given the cold shoulder by a Labor government desperate to distance itself from the pain of indebted homeowners, Dr Lowe was unapologetic for pursuing the national interest.

“The job of the central bank and the central bank governor is to be unpopular at certain points in time and do the right thing for the country. And that’s what I did,” he said at the annual Anika Foundation event.

Dr Lowe said that, on average, he had successfully achieved the 2-3 per cent inflation mandate over his seven-year term, and that he left office with unemployment at near 50-year lows.

But he said he would ultimately be remembered for the disastrous guidance – though never a “promise” – that interest rates would stay low until 2024.

The extraordinary pandemic monetary policy measures also included slashing the cash rate to 0.1 per cent and pinning rates at that level out to three years, followed later by buying $281bn in government bonds.

Dr Lowe said the latter two measures were “helpful but not particularly effective”, and he said Australia should “aspire” to the creation of some “semi­automatic” fiscal stabilisers to help manage the economy once the RBA has pushed rates as low as they can go.

“There is a lot to be learned from this experience, including about how to communicate in uncertain times. But I ask that people keep in mind the circumstances we faced in 2020. It was a very scary time,” Dr Lowe said.

He again urged politicians and the public to embrace reform to lift the country’s flagging productivity performance, saying it was “central to our future prosperity”.

“The problem is not a lack of ideas. Instead, it is in building the consensus within society to implement some of these ideas,” he said.

“This is, fundamentally, a political problem, and it is a major problem. If we can’t build a consensus for changes, the economy will drift and there is a material risk that our living standards will stagnate.”

The outgoing governor’s forthright comments came a day after Jim Chalmers announced Grattan Institute chief executive Danielle Wood as the first woman to lead the Productivity Commission. The Treasurer largely dismissed the recommendations in the most recent five-year PC report, and plans to “modernise” the institution to better align its work with Labor priorities, such as the energy transition.

Dr Lowe said a credible inflation-targeting regime was central to the RBA’s effectiveness, and that this needed to be matched with an equally credible fiscal framework.

“For fiscal policy, an anchor is also important. Governments face many demands on their budgets and when they borrow today, they need to be able to service that debt into the future. Some countries have not dealt with this intertemporal aspect of fiscal policy very well, and public debt levels have kept rising, storing up problems for the future.

“Australia has done better on this front, but we are not immune to the pressures on the public purse, and these pressures are growing. Given this, a strong commitment to a fiscal framework that addressed the intertemporal budget constraint would help.”

He said there needed to be better co-ordination of the infrastructure spending boom, which has been plagued by cost and deadline blowouts.

“Australia’s growing population means that we need to keep investing in public assets … my concern has been that we were seeking to do too much in too short a time.

“A well-established framework, based on rigorous, independent cost-benefit analysis, would help the country plan and sequence public investment,” he said.

Westpac chief economist Bill Evans said it was looking “likely” that Dr Lowe and his board would achieve their objective of regaining control of inflation without pushing unemployment above 4.5 per cent.

“That would be a good outcome, and he would be able to take some kudos for that,” Mr Evans said.

“If inflation isn’t down into the low 3s by the end of next year, then there will be something wrong.”

After 43 years at the RBA, Dr Lowe wished his deputy and successor, Michele Bullock, well, and urged her to adopt a “glass half-full” approach to the challenges ahead.

But Dr Lowe also warned that the task ahead of Ms Bullock, who becomes governor on September 18, may prove even more difficult than during his term, warning “it will be difficult to return to the earlier world in which inflation tracked in a very narrow range”.

“The increased prevalence of supply shocks, deglobalisation, climate change, the energy transition, and shifts in demographics mean either steeper supply curves or more variable supply curves,” he said.

“While this doesn’t mean that the inflation target can’t be achieved on average, it does mean that inflation is likely to be more variable around that target.”