The pointy end of the work of the panel reviewing the Reserve Bank will be to decide whether Governor Philip Lowe committed a sackable offence by saying, over and over, that he expects the cash rate to stay at 0.1 per cent until 2024.
It won’t come to a pink slip and cardboard box because Dr Lowe won’t seek an extension when his term expires in September 2023, like his two predecessors did, but there should be something that feels like a sacking: An external appointment to replace him, and shake the place up.
The 2024 “promise” is complicated: Forward guidance has become an important monetary policy tool, and the governor always made it conditional – that the RBA expected rates wouldn’t change until then – but being so specific about the year was unnecessary, and beyond the requirement of “forward guidance”.
What’s more, the panel may come to see that as just one of many mistakes – monetary policy over the past decade has been a shambles.
The RBA is a fixer-upper, a renovator’s delight, and the review panel members may be seen as the architects hired to plan the restoration.
Inflating house prices
The RBA’s big mistake is hiding in plain sight: Effectively using housing as the main tool to stimulate the economy and in the process generating a debt-fuelled property boom that vastly worsened inequality and is likely to be in the process of ending with an almighty bust.
The RBA is not the only government body responsible for this: APRA applies a generous risk-weighting to banks’ real estate lending, which turbocharges the effect of low interest rates, funnelling cash into higher land prices.
Neither the RBA nor APRA takes any responsibility for the distortions the combination of these policies has caused. The inequality and a dire lack of housing affordability – not their problem.
Meanwhile, Philip Lowe has now pulled the rug from under borrowers who joined the housing frenzy of 2021. As deputy governor Michele Bullock said in her understatement of the year last week: “Recent borrowers are more vulnerable than earlier cohorts.”
With the benefit of hindsight, the Bank of Lowe’s first mistake was cutting rates in the second half of 2019, from 1.5 per cent to 0.75 per cent in three jumps, which is where it was when the pandemic hit in early 2020.
That followed an earlier first mistake: Lowe’s predecessor, Glenn Stevens, took the cash rate from 3 to 4.75 per cent in 2010 while the US Federal Reserve kept the Fed funds rate at zero. As a result, the Australian dollar soared to above parity with the US dollar, causing immense damage to Australian industry, including the end of the car industry.
So before the end of 2011, the Bank of Stevens had to hurriedly turn around and cut the cash rate back down to 2.5 per cent by 2013. There was a pause of 18 months, after which Stevens started cutting again!
In September 2016, when Philip Lowe followed the well-trodden path of deputy to governor, he inherited a cash rate of 1.5 per cent.
He did nothing for three years, following the Fed, and then started cutting again in 2019 – to 0.75 per cent. That was also following the Fed, but they started from 2.5 per cent, not 1.5 per cent.
The benefit of hindsight
I’d say that if he had his time over, the new governor would leave the cash rate where it was, and wish that Glenn Stevens had left it at 2.5 per cent, so that when COVID-19 arrived in early 2020 he had more room to move.
But in 2020, he and the government were staring into an unknowable economic black hole with the nation locked down and cut off from the world, but with a starting point of just 0.75 per cent the rate cuts available obviously just didn’t seem like enough.
So given European-style negative rates were out of the question, those three rate cuts had to be augmented by the new central banking tools invented by Ben Bernanke at the Fed – quantitative easing and forward guidance.
Fair enough. Except Lowe was more specific than any other central banker in the world: He put a year on the next rate hike (2024) and kept it there for nearly 18 months.
Having been rashly made, the three-year promise of a microscopic interest rate was then left too long. The result was a brutal housing boom in 2021 that took the Australian median price up by a ridiculous 22 per cent.
All this and more should be examined in hard-back chairs under strong lights by the panel, and at the end of the process, when the report has been written and solemnly handed to the Treasurer, one of the three panellists, Carolyn Wilkins, should be appointed governor to replace Philip Lowe.
She served for 21 years at the Bank of Canada, including six years as deputy governor, and is currently an external member of the Bank of England’s financial policy committee. In a year’s time, she will know all about the Reserve Bank of Australia.
Carolyn Wilkins will clearly be the best qualified outsider to run the RBA. If she can’t stomach the hardship of living on Sydney harbour and holidaying at Noosa for seven years, then another outsider should be found.
The only previous non-RBA employee to run Australia’s central bank was Bernie Fraser in 1989, but he came straight from being Treasury secretary for five years, so he was really an inside outsider who didn’t shake the place up.
And only one other person was made governor who wasn’t previously deputy governor – Bob Johnston, in 1982. He was the RBA’s “secretary”, whatever that meant; Treasurer John Howard shocked the RBA by overlooking deputy governor Don Sanders, who was given the consolation prize of managing director of the Commonwealth Bank five years later.
The current deputy, Michele Bullock, is undoubtedly a fine economist and administrator, and is the right gender for the job this time around, but the next governor should not have been the deputy.
The Reserve Bank needs to be renovated – and not just its kitchen.
Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news
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