MELBOURNE, Feb 16 (Reuters Breakingviews) - If any central bank governor was to feel the heat from the past year’s multiple interest-rate increases, the smart money might have been on the U.S. Federal Reserve’s Jerome Powell. After all, in 2020 he softened the institution’s inflation-focused monetary policy, saying he’d keep rates low to encourage more inclusive employment even if price rises pierced its 2% target. That arguably stayed his hand on hiking more quickly when inflation picked up. Fast forward and Philip Lowe, governor at the Reserve Bank of Australia, looks most exposed.
The RBA has bumped up rates nine times since May, adding 3.25 percentage points to the cost of borrowing. That’s less than both the Fed and the Bank of England have imposed so far in this cycle, and at 3.35% Australia’s base rate is lower than the BoE’s 4% and the Fed’s 4.5% to 4.75%.
So in theory Lowe ought not to be first in the firing line. He has, though, made some gaffes. He boxed himself into a corner two years ago when he assessed it was hard to see rates rising unless wages increased. He went as far as to say that might mean no hikes to borrowing costs until 2024. He later offered a bizarre non-apology, saying he was “sorry if people listen to what we said and then acted on that”.
He also insisted in 2021 there had been “a complete overreaction to the recent inflation data.” Lowe’s comments were made before Russia’s invasion of Ukraine supercharged prices and were in step with Powell’s view that inflation was temporary.
The U.S. mortgage market gives Powell more cover for the current situation, however. Most American home loans have fixed rates which usually only change if the borrower refinances. Down Under, variable-rate loans dominate, and banks pass on increases quickly. Fixed-rate loans became popular in the low-rate post-pandemic housing bubble, but most only have two-year locks. Some A$370 billion-worth ($255 billion) of those, almost a fifth of the mortgage market, will switch to variable rates this year and next. The resulting financial pain makes Lowe an easy target.
With more rate rises likely and just seven months left on his first term, calls for the RBA governor to go will grow louder; on Wednesday he told lawmakers he has no intention of quitting. It would be unfair for Lowe to be the fall guy for central banks’ general inflation failure. But he may also not be the last to go.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
CONTEXT NEWS
Philip Lowe, governor of the Reserve Bank of Australia, said on Feb. 15 that inflation in the country remains “way too high” even after nine interest-rate increases since last May. The head of the central bank made his comments in front of the Senate Economics Legislation Committee. He will appear before the House of Representatives Standing Committee on Economics on Feb. 17.
When questioned about his future at the bank, Lowe said he intended to serve out his seven-year term as governor, which ends in September. “I think it would be a very bad outcome for the board to have to resign.”
In its quarterly statement on monetary policy published on Feb. 10 the RBA said it expects inflation of 4.3% by the end of the year, higher than its previous estimate of 3.8%.
Prices rose 7.8% in 2022. The RBA said, “the path to achieving a soft landing [for the economy] remains narrow”.
