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Reserve Bank Governor Philip Lowe has had bad press, most of which he doesn’t deserve.
“Lowe Blow” and “Take a Hike” were two headlines on the front page of our newspaper. “We Had Our Phil” was on another front page.
His critics, unhappy with the continued rise in interest rates, seemed content enough when he kept rates low.
![](https://images.theconversation.com/files/494030/original/file-20221108-25-jmy02i.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip)
Daily Telegraph, August 2, 2022
Lowe and his board are pushing interest rates up at almost the fastest pace on record for the same reason they lowered them to record lows to try to get the economy back into some kind of balance.
It’s tough. But it’s been done before and it worked.
Indeed, former Reserve Bank Governor Bernie Fraser, the man who cut interest rates even more aggressively than now and then raised them even more aggressively, said this week that he approves of Mr Lowe’s way of working.
How Low Low Interest Rates Saved Jobs
When COVID hit in 2020, the Reserve Bank’s cash rate was already at a record low of 0.75%. lowered to , and offers banks almost free loans at 0.1%.
Lowe’s promise to buy just enough Treasuries to bring the 3-year Treasury rate down to 0.1% pushed 3-year fixed-rate mortgages below 2%. Variable rate mortgages he fell to 2.5%.
Working with the Morrison government, which has spent heavily in response to COVID, Lowe has cut rates to try to keep the shut down economy alive.
Read more: 5 ways the Reserve Bank is attacking Australia like never before
The best measure of unemployment is what Australians count as unemployed working zero hours. It rose to 15% in April 2020. This is the worst since the Great Depression.
The stimulus package, the arrival of vaccines, the lifting of lockdowns worked like magic, as did the Reserve Bank’s determination to let most people who wanted to borrow borrow at near zero. Spending picked up and by July this year the unemployment rate had fallen to his 50-year low of 3.4%.
And this year, inflation, which has stayed close to the Reserve Bank’s 2-3% target for the past 30 years, has released and picked up. First it was 5%, then 6%, and now it’s 7.3%. All this took place over the course of several months.
Despite earlier hopes (those who were hopeful in the US and UK where this happened called themselves the ‘temporary team’), inflation has not reversed and the original Little indication of a return to the 2-3% Accord.
resurgence of inflation
A 7% inflation rate is important because a 2-3% annual price increase is very different from a 5-7% increase. Inflation will be, in the words of former Governor Bernie Fraser, “a topic not discussed at barbecues.”
For 2-3% of the time, people adopt a fairly stable pricing mental model where they know what they’re getting when they agree to offer a service at a fixed price.
It’s not often that high inflation creates winners and losers. The problem is that it becomes almost impossible to determine who those winners and losers will be. making it difficult to plan
RBA clear instructions
The Reserve Bank has received written instructions from its accountants aiming to achieve “inflation averaging 2-3% over time.”
The only tool it has to accomplish is interest rate manipulation.
Admittedly, much of what triggered the recent burst of inflation was not tempered by high interest rates. Diesel and petrol prices are set internationally and have skyrocketed after Russia invaded Ukraine.
But much of what causes and sustains a resurgence of inflation can certainly be tempered by high interest rates.
Rise in almost all costs
Housing construction is costly due to shortages of (internationally driven) building materials and labor shortages due to COVID-19. It is true that more materials and healthy workers will drive down prices, but so will the demand for building work. Higher interest rates help keep demand down.
Even global oil prices could be held back by high interest rates. It will be held back by high interest rates in the US, not by high interest rates here. The United States is a country big enough for consumers to tighten their belts and make a difference.
In any case, Australian inflation is now incredibly widespread and covers almost everything sold here, including most things manufactured here.
Ten years ago, 32 of the 87 commodities priced by the Bureau of Statistics fell in price, while most others increased. In the latest consumer price update, he counted only six price drops.
Former RBA Governor Verdict
This week, I called the person Lowe is probably best suited to assessing his current job as RBA governor: the person who was in his position 30 years ago.
Bernie Fraser served as Governor of the Reserve Bank from 1989 to 1996. He cut his rate 15 times in three years to hasten the recovery from the recession of the early 1990s. Then in 1994, when inflation showed its first signs of a resurgence, he pushed inflation up faster and more aggressively than Lowe has done so far this year.
“I wanted to shock people,” Fraser said. “I want them to know you’re there, that you’re concerned about inflation, and that you want to stop it.” rice field.
Read more: The RBA is raising rates because it fears it won’t keep inflation under control.
Fraser stopped pushing interest rates only when inflation fell to where it has held for most of the last 30 years. As it happened, he was able to do it without pushing up unemployment too much.
Mr. Fraser said he acknowledged the way Mr. Lowe worked, but said Mr. Lowe was wrong in suggesting that interest rates would stay low for three years during COVID. But he also said that interest rate setting is more art than science.
Fraser believes the shortage will ease over time and inflationary pressures will subside. In the meantime, it is imperative to let people know that banks will do what it takes to keep inflation down until unemployment rises (not necessarily including unemployment).
Fraser believes Lowe has a good chance of returning inflation to 2-3%. He should know – he’s done it before.
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