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Prime Minister Anthony Albanese has taken a swipe at Reserve Bank governor Philip Lowe’s pandemic-era promise to keep interest rates low amid consumer and business anger at its aggressive rate hikes, as a former RBA governor said the most recent increase was a mistake.
Economists said the RBA should be prepared to cop criticism for raising the official cash rate by 0.25 percentage points this week to 4.1 per cent, but some said the bank was being unfairly targeted for doing its job.
Prime Minister Anthony Albanese has taken a swipe at Reserve Bank boss Philip Lowe’s comment about interest rates remaining low.
Asked on Friday why the May budget predicted the cash rate would stay at 3.85 per cent, when that turned out to be wrong just a month later, Albanese said the RBA governor had made a worse wrong call on interest rates.
“The Reserve Bank, of course, makes these decisions independently of government, as you know. And that’s not the only prediction on interest rates that have not been correct,” he said at in conference.
“It’s not as incorrect as the one saying there’d be no increases till 2024. So these things are all relative.”
Lowe made that call in late 2021, just months before the bank board started to raise rates from the historic low of 0.1 per cent 13 months ago.
Since then, the RBA governor has faced mounting criticism for making the call. It ramped up again this week after Tuesday’s interest rate increase.
Following the RBA’s decision, Treasurer Jim Chalmers highlighted the bank’s independence from government and distanced himself from the call, saying he understood there were “a lot of Australians who will find this decision difficult to understand and difficult to cop”.
Bernie Fraser, who was governor of the Reserve Bank from 1989 to 1996 and faced both political and media criticism over the bank’s decisions at the time, said Chalmers appears to have lost patience with Philip Lowe.
“I can understand the treasurer’s response – although it was qualified – but there was obvious impatience and unhappiness there,” he said.
“I thought the treasurer was pretty modest. You know, I’ve been more critical myself because I think it’s a mistake.”
Fraser said this week’s rate rise risked slowing economic activity more than it would slow down inflation.
The former Reserve Bank governor was not alone in criticising the RBA’s decision. Social media lit up with anger at the rate rise, particularly after Lowe said people struggling with increased interest payments could cut back on other spending or take on additional hours to help make ends meet.
An invoice showing the RBA paid nearly $25,000 for a corporate dinner event for 140 business leaders in May, on the same day the board took the official cash rate to 3.85 per cent, fanned outrage when it was released under Freedom of Information to The West Australian newspaper.
Greens leader Adam Bandt – whose party has regularly urged the federal government to step in and override the RBA’s rate rises – pointed out the dinner cost more than what a single person on Jobseeker receives in a year.
Economist Callam Pickering said the Reserve Bank had one job to do and that was to bring down inflation, which it could only do by raising interest rates.
He said the independence of the RBA was also vital for the economy.
“A lot of the discussion around the RBA at the moment is toxic and abusive, and, I think, largely unfair,” he said.
Instead of criticising the bank, Pickering said politicians should focus on what they could do to help fix the problem, particularly given the RBA’s one tool was a blunt instrument.
“It impacts some people very heavily and impacts other people not at all, but it’s the tool that the central banks have to work with,” he said.
“And issues of fairness can really be dealt with by the federal government of the day because they have so many different policy levers that they can pull to shift things around.”
Independent economist Nicki Hutley said it was reasonable for people and politicians, including the treasurer, to question the bank.
“Chalmers, he is right that this is difficult for people to cop. He’s being – as a treasurer should be – empathetic to the person in the street, particularly a person who’s got a mortgage or paying rent,” she said.
“He didn’t come out and say the Reserve Bank’s terrible and they shouldn’t be raising rates. He said, ‘This is difficult’, and, well duh, it is.”
Hutley did not agree with the RBA’s decision to lift rates to 4.1 per cent, and said it increased the probability of a recession to over 50 per cent.
She urged the RBA to improve its communication with the general public.
“You’ve got to be far more sympathetic to people to say we understand how difficult this is, but it is the only way to bring down inflation,” she said.
“It’s the way it’s communicated. It’s just so brutal and blunt, and so lacking in any empathy and I think this is half of what’s wrong with the economics profession.”
Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.
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