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Category: Philip Lowe

  • Reserve Bank inflation strategy questioned

    Philip Lowe Reserve Bank strategy questioned after interest rates rise

    The Reserve Bank inflation strategy has been questioned after Australia experienced yet another official interest rate rise, pushing it to 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 strategy 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    Lowe’s economic perspectives – and that of the Reserve Bank board – reflects outdated thinking, as the world has changed significantly since the 1980s – the onset of neoliberalism – and the economic model of that era is no longer applicable.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.

    The post Reserve Bank inflation strategy questioned appeared first on New Politics.

    This post was originally published on New Politics.

  • A Matter of Interest: The RBA, Inflation and Corporate Profits

    He is one of the least empathetic of beings, a cold fish, bothered and irritated. Captured by the cradle of numbers (he is an economist); obsessed by the spreadsheet of projections that may never result, there is not much to recommend the chief of the Reserve Bank of Australia, Philip Lowe. Come to think of it, there is not much to recommend any of them, these high priests and priestesses, all of the same, pontificating cathedral.

    What stands out regarding Lowe is his almost heroic lack of tact. He will forever be saddled with those remarks that encouraged many Australians to rush to the banks to take out loans. When asked at the National Press Club in February 2021 about his “pledge” not to raise the cash rate for at least three years, Lowe was defiant: “I haven’t pledged anything”; 2024 was merely a “best guess”.

    The bank’s own internal review, published in 2022, noted that the RBA board had indicated in late 2020 and much of 2021 “that the first interest rate increase was not expected for ‘at least three years’, and then not until ‘2024 or later’.”

    The confident assertion by Lowe and fellow board members proved to be a spectacular howler. “Given the outlook was highly uncertain, the board could have given more consideration to potential upside scenarios, including scenarios that could warrant raising the case rate earlier than anticipated.”

    Of late, Lowe has done himself few favours. The RBA has presided over twelve increases in the cash rate; the current benchmark interest rate lies at 4.1%, with promises of further hikes. It is the highest level since April 2012.

    In his cold fish style, Lowe has openly suggested that people could “cut back on spending, or in some cases, find additional hours of work, that would put them back into a positive cash flow position.” While social media is not exactly the ideal barometer at the best of times, a collection of remarks is worth noting. “Regardless of if you are left leaning, centre or right, everyone has a reason to hate this guy,” states a certain Chazwazza. Andrew Hughes (if that be his name) suggests that economists brush up on their “EQ courses in what they teach. Because people are those numbers.”

    In short, the Reserve Bank, and other central banks vested with such powers, are often there to make lives miserable on the pretext of improving them. The error never lay with the public: they were told to shut up and shut shop for months, avoiding family, friends and life. All that time, government stimulus – for the fortunate – found their way into bank accounts, much of it unspent. The time for inflation was surely bound to come.

    The picture of inflation, however, was always going to be more complex. In that regard, the RBA is curiously unimaginative in reading inflationary pressures, showing a continued fixation with wages and labour costs. While rising wages can tease the inflationary demon, what about other sectors of the economy, such as corporate profits? Not so, say a number of business leaders, adamant that companies are being unfairly singled out for embracing the profit motive.

    The Australia Institute has a rather different view on this. Through its Centre for Future Work, it published a report in February arguing that 69% of inflation beyond the RBA’s target band of between 2% and 3% could be put down to burgeoning corporate profits. “Rising unit labour costs account for just 18% of that inflation.”

    The post-COVID inflation phase, characterised by a decline in real wages, labour share of GDP, and record corporate profits stood in sharp contrast to the 1970s, when the opposite effects were felt. “This historical comparison confirms that fears of a 1970s-style ‘wage price spiral’ are not justified. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.”

    The report, authored by Jim Stanford, did something Lowe obstinately refuses to do: consider the resources sector, Australia’s single most dominant economic performer, as part of its economic analysis. “For the first time, in 2022,” states Stanford, “mining profits accounted for over half of all corporate operating profits in the entire economy.” But in Lowe’s analysis, revealed in his National Press Club address delivered in April, “the share of profits in national income – excluding the resources sector, where prices are set in global markets – has not changed very much over recent times.”

    The obvious logic of the Australia Institute irritated the RBA as being a touch cute in its methodological assumptions. Stanford’s paper duly made the rounds in internal discussions. A briefing note from the RBA’s domestic activities and trade section claimed that, “Profits and inflation do not have a direct accounting relationship. To examine the profit-inflation relationship properly, one requires a model and a measure of markups.” Another RBA report, examining web data gathered from 58 firms and 25 million unique items, concluded that “rising prices tend to be associated with lower margins”.

    In what could only be seen to be a campaign launched on behalf of big business and its followers, calls for repudiation and recanting followed. Economics academic Richard Holden demanded that the Australia Institute “admit their mistake and retract their so-called analysis.”

    There was just one problem with the criticism of Stanford and company. Far from being methodologically unsound, other notable bodies had embraced it. As part of its 2023 Economic Outlook, the OECD, on decomposing the GDP of 15 nations, found “a significant part of the unit profits contribution has stemmed from profits in the energy and agriculture sectors, well above their share of the overall economy, but there have also been increases in profit contributions and manufacturing services.” It also found that “a large part of the higher unit profits contribution originates from mining and utilities, even in commodity-importing economies”

    Earlier this month, the President of the European Central Bank (ECB), Christine Lagarde, also focused attention on the role played by galloping corporate profits in pushing up inflation. The data on corporate profits, she rued, was simply not as good as it was on wages.

    On this score, the economic managers in Australia have revealed themselves as callous and conservative. Bedazzled by the extraction industries and unable to pursue a productive agenda, they continue to wage war on those irritating wage earners who demand absurdly modest increases to keep pace with inflation. As long as Lowe and the RBA are allowed to do it, more harm is in the offing.

    This post was originally published on Dissident Voice.

  • Fight inflation by taxing the rich

    The Reserve Bank of Australia claims it is “fighting inflation” by hiking up interest rates. But, as Zane Alcorn argues, it has never been independent of the capitalist class and is dutifully carrying out its interests.

    This post was originally published on Green Left.