Economists Split Over Whether RBA’s Lowe Deserves Another Term

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(Bloomberg) — Australian central bank chief Philip Lowe’s prospects for an extension of his role are far from clear-cut, according to economists, with some highlighting political hurdles to his reappointment.

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Eleven of 21 economists contacted by Bloomberg said the governor deserved three more years at the helm, as was the case with his two predecessors. The remainder argued Lowe’s policy and communication errors meant he should be replaced, preferably by someone from outside the Reserve Bank. 

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Most economists opted to remain anonymous because of the political sensitivity of the issue. The governor’s current seven-year term expires in September.

Lowe, 61, has faced intensifying criticism during his tenure. This ranged from the RBA failing to achieve its 2-3% inflation target prior to the pandemic to then sticking with ultra-loose policy for too long and struggling to deliver coherent guidance. This has made his reappointment a contentious issue. 

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Treasurer Jim Chalmers says he will use an independent review of the bank — due in March — to inform his decision and will likely make an announcement on the governor around mid-year. Lowe says he wants to remain in the role.

“Navigating a once in 100-year pandemic is an incredibly difficult challenge,” said James McIntyre, Australia economist at Bloomberg Economics who argues Lowe should be reappointed. “While some may find fault with the RBA’s decisions through the period, the results arguably speak louder.” 

Australian employment is at an all-time high and the economy is in better shape than most counterparts, McIntyre said, adding that while inflation is elevated, that’s driven primarily by external factors.

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Those in the no camp point to forecasting errors, the RBA holding on to a yield target for too long and the governor completely misjudging the timing of rate liftoff. They say these are reason enough not to renew him. 

Yet Lowe’s report card looks good overall. During the first six years of his term, headline inflation averaged 2.7% and core prices 2.4%, both close to the 2-3% target midpoint. Meanwhile, unemployment is at a 48-year low. 

In addition, most central banks struggled with forecasting during the pandemic and few came through it unscathed in terms of criticism.

Some economists say that while Lowe’s metrics are sound enough to warrant a three-year extension, the politics of his reappointment may prove complicated. That’s because Chalmers, having ordered the review of the RBA, will want to be seen to freshen up the institution in its aftermath.

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But there isn’t a ready replacement inside the central bank given Deputy Governor Michele Bullock is still new to her role and probably not yet ready for the top job. One rumor is that former RBA No. 2 Guy Debelle, who quit in March 2022 to join billionaire Andrew Forrest’s clean-energy venture, could return.

A more realistic option would be to recruit offshore. The RBA has been criticized for insularity, with every governor bar one coming from inside the institution.

Another reproach of the RBA is a lack of private sector experience among senior officials. The make up of the rate-setting board has also been faulted for a lack of monetary policy expertise.

A majority of economists said they expected the review to recommend a shake-up of the RBA’s board, which is dominated by business figures. 

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If that turns out to be the case then, not wanting to cause too much disruption, the government will likely extend Lowe’s term while appointing new board members, two respondents said.

The RBA has faced heavy censure over forward guidance that suggested interest rates wouldn’t rise until 2024, a pledge it abandoned in May last year as inflation surged. The bank has since hiked by 3 percentage points in the most aggressive tightening cycle since 1989.

One economist in favor of Lowe’s extension said replacing him now might look like the government is uncomfortable with rapid-fire rate increases to contain consumer prices.

Lowe’s two predecessors also faced challenging periods: Glenn Stevens with the 2008 global financial crisis and Ian Macfarlane with the 1997 Asian Financial Crisis. Both served 10 years as governor.

But neither faced anything on the scale of a global pandemic or were forced — like Lowe — to adopt unconventional policies.

Those economists opposed to extending the governor argue that someone outside the central bank needs to be brought in. One candidate suggested was Kevin Warsh, an ex-Federal Reserve policymaker.

Another economist said there’s no need to be prescriptive about what the next governor does currently, but that the net should be cast wider than it has been previously.

—With assistance from Cynthia Li.