SYDNEY (AP) — Australia’s central bank chief suffered a premature end to his 43-year career on Friday as past pandemic policy missteps tested public trust in the institution, so the government was forced to fire him.
If there is a moral to the story of Reserve Bank of Australia (RBA) Governor Philip Lowe, it is that when it comes to policy stimulus, no matter how well-intentioned, too much can be done.
Lowe’s dedication to the bank is not in doubt, having joined directly from the school in 1980. Armed with a Ph.D. from MIT, he rose steadily through the ranks to lieutenant governor in 2012 and to the top job four years later.
The smart and soft-spoken Lowe was determined to use the full powers of the RBA to support the economy when the pandemic struck and Australia closed its borders, along with much of its economy.
A series of cuts pushed interest rates to a record low of 0.1 percent, while the bank pumped hundreds of billions of dollars into the economy through bond purchases and cheap lending to banks.
When combined with massive government fiscal spending, the stimulus turned out to be a huge success and Australia became the first developed nation to regain economic output lost from the pandemic.
Even now unemployment is near its lowest level in 50 years at 3.6 per cent and there are more Australians working than ever before.
However, the use of so much unprecedented politics carried risks, and Lowe made two major mistakes. The first affected mainly the markets, while the second, and more fateful, soured sentiment among the public and politicians.
The first came in late 2021 when Lowe, faced with tensions in the debt market, decided to abruptly end the bank’s short-term bond purchases, a major element of its stimulus campaign.
The shock move attacked bond prices and investors were wrong, leaving many investors with painful losses. A subsequent review found that the event had caused “reputational damage” to the bank and that the policy was unlikely to be used again.
It also wiped Lowe’s notebook with a powerful investment community that might otherwise have been more fickle in its defense.
The most telling mistake was Lowe’s aggressive use of forward targeting, a common ploy to get people to borrow and spend more by promising not to go the punch road.
READ: Australia’s top central banker apologizes for previous rate guidance
Lowe’s mistake in 2021 was being too specific about timing by repeatedly saying rates were unlikely to increase until 2024.
That projection was strongly cautioned that the bank’s economic forecasts were correct, but the distinction was lost in translation and regularly reported by the media as a “promise.”
Policy quickly began to unravel in early 2022 as domestic demand picked up much faster than anyone expected and a wave of global inflation washed ashore Australia.
With prices rising rapidly, Lowe was forced to reverse course and raise rates in May, two years ahead of schedule.
READ: Australia central bank stuns market with 25bp rise, says more may be needed
By then, Australian households were saddled with record amounts of debt and did not adjust well to rising borrowing costs. Many blamed Lowe for misleading them and bombarded lawmakers with angry messages demanding his head.
Much of the media soon joined in, and a tabloid sent paparazzi to Lowe’s home to capture him taking out the trash.
Lowe withstood the pressure and defended his record by pointing to the strength of the job market. However, in a testy exchange with lawmakers, he took the extraordinary step of apologizing to anyone who trusted the bank and borrowed money as a result.
“I certainly regret if people listened to what we said and then acted on it,” Lowe admitted, words few central bankers would dare utter.
But the clamor only grew louder as the RBA continued to tighten, raising rates 12 times to a decade high of 4.1 percent.
Feeling the political heat, Treasurer Jim Chalmers launched an independent review of the central bank that recommended a radical reorganization of its operations, including granting more voting power over policy to outside “experts.”
READ: Australia’s central bank will have a new rate-setting board under review recommendations
Lowe’s position was increasingly in doubt as Chalmers came under intense pressure not to extend his seven-year term when it ends in September. Both of Lowe’s predecessors got extensions, serving 10 years each.
While Chalmers professed great respect for Lowe, he was actively considering a number of potential replacements, including current Lieutenant Governor Michele Bullock and several long-serving public servants.
In the end, Bullock was seen as the “ideal” candidate to lead a new era at the bank.
“This is a historic appointment,” Chalmers told reporters. “Michele Bullock will become the first woman to lead the Reserve Bank in this country.”
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