Time has officially been called on Philip Lowe’s leadership at the Reserve Bank of Australia, with Michele Bullock appointed as the bank’s new governor on Friday.
Jim Chalmers and Anthony Albanese have been keen to point out that the change in leaders was not a personal reflection on Lowe, stating that after “more than four decades of dedication and commitment and service … Phil Lowe goes with our respect, he goes with our gratitude, and he goes with dignity”.
Indeed, Lowe’s work as governor during the onset of the Covid-19 crisis was top-notch; working around the clock to keep the economy afloat during a myriad of lockdowns and restrictions. He was also a critical part of the RBA’s response to the global financial crisis, helping stave off a recession in 2008 as head of the banks’ financial stability group.
So why was he not reappointed for another three-year term?
One reason we can rule out is interest rates rises.
While unpopular, the recent spate of cash rate hikes has been in line with the RBA’s mandate to fight inflation and with how other central banks around the world have been responding to the surge in prices. Lowe’s successor, Bullock, will need to continue along the same trajectory – with one or two more interest rate rises expected before the RBA pauses – so this is unlikely to have driven the government’s decision to change governors.
But I would argue that there are three key mistakes that Lowe made during his time as governor that made an alternative candidate more attractive.
The first, and perhaps biggest mistake was trying to rein in house prices prior to the pandemic with high interest rates.
One of Lowe’s big ideas as an economist was his concern about the risks of rising house prices and household debt. From 2016 to 2019 he put these ideas into action and kept interest rates elevated in an effort to rein in house prices. But these high interest rates ended up hurting the labour market, costing Australia more than 270,000 jobs and causing devastatingly low wage growth. This error was eventually reversed, but the years of subdued growth and a weak labour market was a clear failure of the RBA’s mandate to provide for full employment.
The second mistake Lowe made – and the one he received the most criticism for – was his repeated statements as recently as late 2021 that the RBA did not expect to raise interest rates until “at least” 2024. While these comments were always phrased as a guess and not a promise, the rapid interest rate hikes starting in May last year have badly damaged the RBA’s credibility. The fact that the public closely associated the board’s guidance with Lowe personally is likely one reason why the government thought the RBA would be better served with fresh leadership.
The final error Lowe made during his time as governor was his failure to address cultural problems inside the bank. A recent review of the RBA made it clear that the RBA has serious cultural problems, with a hierarchical work environment in which bad decisions are not questioned. Less than half of the staff believed promotions are awarded on merit, and the senior leadership were not seen as being open to views that are different from their own. Given Lowe rejected several of the review’s findings, it was always going to be difficult to achieve cultural change under the same leadership team. Appointing a new governor – even one from within the RBA – arguably provides a better opportunity to shake things up and improve the culture in the years to come.
Overall, Phil Lowe was an adept economic firefighter. When crises hit Australia in 2008 and 2020 he worked hard at the policy coalface to help save Australian households and businesses from economic catastrophe. However, central banking is a difficult business and Australians rightly demand a high level of performance at all times, not just when disaster strikes. That task now falls to Bullock, who must now make the RBA fit for purpose for whatever disasters the next decade may throw at us.
• Dr Isaac Gross is an economics lecturer at Monash University
