“I recognize, however, that while this approach has helped us avoid some damaging long-term scars, it has contributed to the inflationary pressures we are currently experiencing.”
The concept of insurance seems to have first appeared in Lowe’s remarks in February. But it seems to be gaining ground; the analogy also appeared in his interview with Leigh Sales on ABC Television 7:30 a.m. program last month.
“We were facing incredibly scary and damaging times,” Lowe told Sales. “We have taken out insurance. Maybe we took on too much, but in the time we had to face and the decisions we had to make, I think it was the right thing to do.
There is an appealing logic to this analogy. Year after year, Australian households spend money on a form of insurance they don’t use, but are happy to know they have.
Plus, there’s a humility in the line – the RBA may have been wrong to keep rates so low for so long, but at least it was wrong for the right reasons.
However, it also feels like there is a subtle rewriting of history.
The emergency rate cuts at the start of the pandemic were certainly presented as a bulwark against pandemic catastrophe – the famous bridge to the other side.
But as rates have been unchanged through the final months of 2021 and into 2022 – and indeed, as Lowe hinted last October, they would remain unchanged through 2024 – there has been little discussion that it was insurance against further economic weakness.
At that time, the recovery was in full swing. Lowe’s main argument was that the bank could afford to be patient on rates, as unemployment was headed for historic lows and inflation was not the threat it posed overseas.
There was certainly no suggestion of insuring against the change in the psychology of inflation that Lowe now dreads.
There is no doubt that the review will delve into this episode within its broad mandate which will include the RBA’s 2-3% inflation target, the structure of the board of directors, the communication approach of the bank and its culture, its management and its recruitment.
There are some interesting possibilities. Could we see, for example, the review suggesting more board members with expertise in economics and fewer members from the business community? Could the RBA be asked to expand its remit to have an eye on the housing market, as happened recently with the Reserve Bank of New Zealand?
Does the inflation target survive or is a different approach recommended? What will a review of the RBA’s forecast function, which has notably misread inflationary pressures in recent months, think?
Lowe was already facing a big 12 months as he navigated the scrapping of his insurance policy and the implications of his new fight against higher-than-expected inflation.
Now he will do all of this with independent scrutiny over his shoulder.