Philip Lowe may yet go down as one of the unluckiest central bank governors in Australian history or perhaps elsewhere.
Within a few days, the treasurer, Jim Chalmers, will decide on whether to extend the Reserve Bank governor’s seven-year contract when it concludes in mid-September. Few expect Lowe will get the nod to stay on.
By September, though, we might find out that the next governor has no need to lever interest rates higher. While slowing, the economy might also avoid a contraction thanks to a burst of migrants flocking to what Lowe called this “wonderful country”.
“It is possible that some further tightening will be required to return inflation to target within a reasonable timeframe,” Lowe said in his speech in Brisbane on Wednesday. Economists zeroed-in on “possible” as being notably dovish.
Add in a jobless rate remaining surprisingly small, a government that is about to report a $20bn-odd surplus for the fiscal year just ended, and an inflation rate that is turning sharply south.
Could Lowe reasonably exit in better circumstances?
To be sure, many will hold a grudge against the governor for forecasting – but not promising – in late 2021 interest rates were unlikely to rise until 2024. Those who took out mortgages and are battling to make repayments have grounds to gripe (although many would-be buyers might be regretting their caution as rents soar and home prices start rising).
No central bank governor predicted Russia’s blitzkrieg against Ukraine in February 2022 that turned a transitory post-pandemic inflation into something more insidious – not even those at banks with a separate monetary policy board, an innovation that will now be foisted on the RBA thanks to an unluckily timed review of the institution.
Lowe seems unconvinced the current rates-setting method needs an overhaul. He accepted the review’s recommendation to cut the number of rates meetings from 11 to eight a year, but was hardly in a position to refuse it or other changes.
There’s no denying many people are under financial duress. Evictions are on the increase, tenants’ advocates say, and there are signs forced home sales are on the rise.
But major banks appearing before the House of Representatives economics committee on Wednesday said that, at this point, they aren’t picking up a jump in bad loans.
One NAB executive told the committee, “we expected it to be worse that it has already played out”. That said, the timing and extent of stress remain unclear.
ANZ, too, was also upbeat. There has been much talk, for instance, about a “mortgage cliff” facing borrowers suddenly shifted from fixed loans with a 2% annual interest rate when they mature to three times that. “A significant bulk” of such mortgagors had already converted, the ANZ chief executive, Shayne Elliott, said.
The bank boasts that its customer base may be “skewed” to borrowers slightly better positioned than the average. Still, just $6 of every $1,000 owed to the bank is overdue more than 90 days, a ratio lower than pre-Covid times.
“People are in a remarkably good shape”, Elliott said while conceding phone calls from customers for help were “up a little bit”.
The ANZ, though, expects at least two more 25 basis-point interest rate rises in August and September to take the cash rate to 4.6%. And by 2024, the bank predicts an unemployment rate that is now hovering at 3.6% – near the lowest rate in 50 years – will climb to 5%.
If the jobless rate does begin to rise, though, it will remove more of the inflation impetus that already seems to be in the works. China sinking towards deflation may also ease global pricing pressure, as will another drop in US inflation.
Lowe’s successor will then have the scope to cut interest rates sooner than many people expect now. If that is what transpires, an unlucky Lowe watching on from the sidelines might justifiably feel due some of that credit.
