Reserve Bank strategy questioned after interest rates rise

Last week, Australia experienced another official interest rate rise, pushing it to a staggering 4.1 per cent – a level not seen since 2012. As the nation grapples with the economic implications of this increase, the customary blame game has ensued, with fingers pointing in various directions.

While the Labor government is being singled out by some for its policies and budget, business leaders are also attributing the rate hike to the Australian Council of Trade Union push for higher wages, even though they never consider how high corporate profits are contributing to this crisis. However, amidst the accusations and complex economic dynamics, there is a growing sentiment that the Reserve Bank’s strategy is unclear and potentially ineffective.

The more sensible economists argue that the blame cannot be placed solely on one party or entity. Economic problems are multifaceted, making it difficult to pinpoint a single cause but, ultimately, the responsibility falls on the government of the day to find solutions. There is mounting dissatisfaction with the Reserve Bank’s handling of the situation, as it appears to be struggling to alleviate the growing stress caused by rising rents and stagnant wages.

Reserve Bank Governor, Philip Lowe, attracted criticism with his simple suggestion that individuals could mitigate the impact of these economic challenges by cutting back on spending or finding additional work hours to improve their cash flow. Of course, this is easier said than done and Lowe should have chosen his words more carefully. Critics argue that raising interest rates, while a traditional tool to influence the economy, may not be the most effective solution to address underlying economic issues and the blunt nature of this approach raises doubts about its ability to alleviate the community’s financial strain.

The leftover of neoliberalism thinking

Lowe’s economic perspectives – and that of the Reserve Bank board – reflects outdated thinking, as the world has changed significantly since the 1980s – the onset of neoliberalism – and the economic model of that era is no longer applicable. Critics find it concerning that a policy based on such antiquated thinking could have far-reaching negative consequences for the economy.

The issue of rising rents exacerbating the financial burdens faced by renters has also come under scrutiny. It is commonly observed that when interest rates increase, landlords often raise rents to cover their mortgage repayments. While this practice may not be morally justifiable or desirable, it is a prevailing reality.

There is skepticism about Lowe’s long-term tenure as the Reserve Bank Governor. Some speculate that the government will remove him before September, when a new board structure is set to be implemented. The planned restructure of the Reserve Bank board, where one part focuses on interest rates and the other handles other aspects of monetary policy, might signal a change in leadership. Critics also argue that Lowe’s public statements and his performances demonstrate a lack of connection with the concerns and issues that affect mainstream Australia, potentially undermining his credibility.

While the Reserve Bank’s role primarily revolves around targeting inflation, it has also acknowledged the adverse effects of rising rents and low wages on community stress levels. However, the complexity of the economy necessitates more comprehensive solutions than merely adjusting interest rates to control inflation.

A better Reserve Bank suited for the times

Acknowledging the need for change, the federal government has initiated a reform of the Reserve Bank’s board. This move, coupled with concerns over Lowe’s competence and diminished public confidence, raises doubts about his chances of being reappointed in September.

In contrast, past Reserve Bank governors such as Glenn Stevens, Ian Macfarlane, and Bernie Fraser commanded respect and instilled confidence through their thoughtful decision-making processes. Even when faced with difficult choices, they approached their responsibilities with a stronger desire to improve the economy: Lowe’s performance falls short of this standard, as evidenced by his comment that interest rates would not rise until 2024, only for them to be raised on 14 occasions over the past 12 months.

As Australia grapples with economic uncertainty and rising interest rates, questions surrounding the Reserve Bank's strategy and Lowe’s leadership continue to intensify. The blame game and finger-pointing persist, but the underlying economic challenges are complex and require comprehensive solutions. As the government prepares to reform the Reserve Bank’s board, the nation awaits potential changes in leadership that could shape its economic trajectory.