When you’re in the top job in any organisation if you don’t get it right, you’re out. Whether it’s the coach, CEO, or Prime Minister, they are the first to go when things go wrong. So, it’s beyond comprehension that after getting it so wrong so often that Phillip Lowe is still the chairman of the RBA (Reserve Bank of Australia). He got it wrong on inflation. He got it wrong on rates. He got it wrong when he told the Australian public as recently as 2021 that rates won’t go up until 2024. He’s getting it wrong again now. He is still hoping that inflation is transitory. Even in his speech today he’s indicated a pause in rate rises as soon as May. Yet with interest rates at only 3.6% following yesterday’s interest rate increase, there is a long way to go before the RBA tames inflation at over 7.8%.
Here's the thing. If you’re too tough on inflation you can drop rates quickly but if you are too soft on inflation and it becomes entrenched it’s a recipe for economic disaster. I appreciate that many of the initial drivers for inflation have been on the supply side and there isn’t much the RBA can do about that. However, inflation is an insidious cancer. If you don’t do everything to remove it, it will find its way into other parts of the economy. This is a genuine concern. This is already happening in the USA where as recently as January it was thought inflation was starting to be tamed. Yet just a month later, data has shown it is likely to re-emerge. Many say Lowe’s doing too much, but everyone continues to underestimate inflation. I don’t think he’s done enough.
After some horrendous missteps, Lowe now seems more worried about managing expectations rather than inflation right now. Why else would you increase rates by only 1.25% over the last 6 months and say there is still more to come? The RBA are compounding their initial mistake of being far too slow to act by now being far too slow to raise rates. Their argument that it takes time to see the economic impact of rate increases would have been better served by front-loading the rate hikes and doing 0.5% in Oct, Nov and December 2022. It’s a slightly higher overall increase but now they would have had 3 months to observe the effects instead of still talking about what theoretically may happen.
If Lowe thinks there are more rate increases to come, then get on with the job and increase rates by the amount needed to make an impact. We should have rates at well over 4% right now. There’s far too much mollycoddling all around in my view. If people with mortgages are going to suffer financial pain because they listened to him the first time and borrowed too much, then so be it. That’s how markets work. There’s too much trying to signal intentions and too many cleverly crafted speeches for people to interpret the language. He’d be better off playing it with a straight bat. There are winners and losers. It’s not his job to worry about consumers’ feelings or mental health, it’s his job to manage inflation and that means making the hard decisions that are needed. The overall consequences will be worse if he delays.
There are really two ways to kill off inflation, the first is by raising interest rates. By doing so Central Banks seek to increase borrowing costs sufficiently that it reduces spending, dampening demand for goods and ultimately slowing the economy and the pace at which prices go up. There is a second, less common solution and that is simply inflation itself. If left to run rampant inflation eventually leads to demand destruction for goods and services resulting in a similar effect to that of rising interest rates, except it's uncontrolled.
I’d liken raising interest rates to the back-burning of forests. Back-burning results in deliberately burning forests in a controlled, planned manner that is designed to mitigate a disastrous bushfire that engulfs everything. Letting inflation run wild is the equivalent of an out-of-control bushfire with no back-burning. Central banks slowing or pausing rate hikes in anticipation of a slowing economy is the equivalent of not fighting a fire because you hope there is rain coming. Maybe it does, maybe it doesn’t but you can’t afford to take the chance. You fight the fire with everything you’ve got while it’s burning.
What we’ve got currently are the most difficult set of inflationary economic pressures in 40 years. There is no easy solution. The reality is either way there is going to have to be pain here. Either it’s the pain of inflation or the pain of rate rises. One results in controlled inflation, and one doesn’t. The fact that raising rates will cause many financial pain and hardship does not mean it’s the wrong path. That soft approach to dealing with economic problems only leads to a bigger problem later. At the first sign of pain, the outcry leads to short-term fixes, not long-term solutions.
Lowe has repeatedly shown he is not capable of getting the basic decisions right. Nor has he been able to navigate the political tensions that arise with making conditions tougher for the economy in the short term for its benefit in the long term. He didn’t take the pain early and now whichever way he turns there is a bigger problem. Conveniently for the Government, when public outrage hits fever pitch later this year because either inflation is too high, or interest rates are, it will be Lowe’s fault. So, the government will not remove him until it is politically necessary. Regardless of that, Chairman Lowe has got it wrong too many times and needs to go.
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