Lowe departs; reflects on his challenges as governor

Outgoing Reserve Bank of Australia (RBA) governor Mr Lowe delivered his speech at the Anika Foundation (7 September) for the seventh and final time following his seven years as the RBA’s governor and ending a 43-year career with the central bank.

In his speech, Mr Lowe noted the three main challenges he had while sitting as governor; a protracted period of inflation being below target, the COVID-19 pandemic, and the highest inflation rate in over three decades.

“None of these events were widely predicted and none were unique to Australia,” he said.

“Inflation has been more variable over my term as governor than it was in the previous two decades; over the past seven years, inflation has varied from a low of -0.3 per cent to a high of 7.8 per cent.”

Mr Lowe’s view is that it will be challenging to “return to the earlier world” where inflation tracked in a very narrow range.

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

“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,” Mr Lowe said.

Mr Lowe spoke on the central bank’s and government response to the pandemic and with the power of hindsight said that perhaps they “did too much”.

“We got some things right, but we got other things wrong. I can assure you, though, that the staff of the RBA and members of the Reserve Bank Board have been relentless in their pursuit of doing the right thing and supporting the economic prosperity of the people of Australia,” Mr Lowe said.

High cost of housing a ‘serious economic and social problem’

One of the fixed points Mr Lowe spoke on during his speech was the link between monetary policy, credit growth, and asset prices.

He stated that interest rates directly influence how much people want to borrower and the value of assets.

“This means that central banks can’t wash our hands of what is happening on the financial side and we need to work closely with the prudential authorities to contain the build-up of financial and macro-economic risk,” Mr Lowe said.

Furthermore, he said while interest rates can influence the price of housing, they are not the only reason for the high cost of housing in Australia.

He said this is the “outcome of the choices we have made as a society”, such as where we live, how we design our cities, how we zone and regulate urban land, how transport systems are designed and invested in, and how we tax land and housing investment.

“In each of these areas, our society and politicians have made choices that lead to high urban land and housing costs. It is by tackling these issues that we can address the high cost of housing in Australia, which I view as a serious economic and social problem,” Mr Lowe said.

Backlash as governor

Mr Lowe noted that he was aware that some of the decisions the RBA governor needs to make will be unpopular with the public and media.

He took this opportunity to clear the air about the various points that have been attributed to him during his tenure, particularly when the RBA began hiking rates in May 2022.

Mr Lowe said that his points and explanations being misconstrued, such as a “promise” made that rates won’t go up until 2024 and that young adults should stay with their parents because of the rental crisis, highlighted the difficulties of communicating in the digital and social media age.

“Despite these difficulties, I have always felt a responsibility to explain complex ideas, and the trade-offs and uncertainties we face,” Mr Lowe said.

“My view is that we will get better outcomes if the public square is filled with facts and nuanced and informed debate, rather than vitriol, personal attacks, and clickbait.

“As a society, we have got work to do here.”

Lowe’s last year

Indeed, a lot of the criticism and controversy Mr Lowe garnered from the media, borrowers, and mortgage industry alike were due to the unprecedented, and what has been referred to as “aggressive”, monetary policy tightening cycle that saw interest rates rise for 10 consecutive months and a total of 12 rate hikes.

The official cash rate at this time was raised 400 bps, from the emergency and historical low of 0.1 per cent set during the pandemic, to 4.1 per cent.

The official cash rate has now been held steady for three consecutive months; with many economists predicting the cash rate peak has been realised.

Michele Bullock is set to take the reigns as RBA governor on 18 September.

“I would like to close by wishing Michele and her team all the best,” Mr Lowe said.

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