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Philip Lowe Defends Record and Calls for Greater Coordination Between Monetary and Fiscal Policy

4.6

Charles M. Hall

September 07, 2023

Outgoing Governor Stands His Ground

SYDNEY - Philip Lowe, the outgoing governor of the Reserve Bank of Australia (RBA), has used his final public speech to staunchly defend his record leading the central bank. He also called on policymakers to enhance coordination between monetary and fiscal policy as a means to effectively manage economic cycles.

Lowe's seven-year tenure at the RBA will conclude on September 17, following a challenging period for the central bank. Increased inflation rates prompted an upsurge in interest rates, resulting in intense criticism of the institution – an obstacle Lowe passionately confronted.

During his speech, Lowe took aim at various critics, including the media. He stressed that central banks are not clairvoyant and that policymaking should consistently account for economic shocks such as the ongoing Covid-19 pandemic.

In contrast to his two predecessors, Lowe's term as governor was not granted a three-year extension. The current Deputy Governor, Michele Bullock, has been appointed as Lowe's successor by Treasurer Jim Chalmers.

Standing Firm on Inflation Target

Lowe firmly rejected calls to either lower or raise the RBA's inflation target, which stands between 2% and 3%, as a means to mitigate any potential consequences of the central bank's monetary policy response.

"I have consistently argued against such calls. It wouldn't be much of a nominal anchor if the target was moved just because the tide was running in one direction for a while," he stated during a charity event.

Lowe emphasized that maintaining commitment to the established target is essential unless there is a compelling case for change, which, according to Lowe, does not exist.

Enhancing Collaboration between Monetary and Fiscal Policy

Lowe also underscored the necessity for governments and the RBA to collaborate more closely during times when economic circumstances require it.

Presently, it is assumed that monetary policy will shoulder the majority of the responsibility due to its agility compared to fiscal policy. However, Lowe stressed that there should be an aspiration for something better, urging further cooperation between the two realms.

"While fiscal policy may be less nimble, it does not mean we shouldn't aspire to a more balanced approach," he emphasized in closing.

Monetary Policy and its Limitations

Monetary policy is a powerful tool that can greatly impact the economy, but it does have its limitations. Additionally, its effects are not evenly distributed throughout the community. This is a sentiment expressed by Lowe, an expert in the field.

The Role of Fiscal Policy

Lowe suggests that fiscal policy could offer a more robust solution, albeit requiring a reevaluation of the existing policy framework. This approach would provide a stronger helping hand to address economic challenges.

Revitalizing Productivity Growth

One pressing concern that Lowe emphasizes is the stagnation of productivity growth in Australia over the past decade. This issue poses a threat by potentially keeping inflation and interest rates at higher levels. Thus, Lowe calls for policy action to reinvigorate productivity growth.

Implementing Ideas: Overcoming Obstacles

Although there are no shortages of innovative ideas, the main challenge lies in building consensus within society to implement these ideas effectively. Lowe emphasizes that it is fundamentally a political problem, and it is one of significant magnitude.

Dismissing the RBA's Responsibility for Housing Prices

Lowe defends the Reserve Bank of Australia (RBA) against accusations that it is solely responsible for the inflated house prices and mounting household debt in the country. He clarifies that while interest rates do influence housing prices, they are not the root cause of Australia's high housing costs.

Society's Choices and its Impact on Housing Costs

The inflated housing costs in Australia are a result of societal choices. These choices center around factors such as where people decide to live, city design, land zoning, urban land regulation, investment in transportation systems, and taxation policies related to property investments. Addressing these issues is crucial to combatting the high cost of housing in Australia, which Lowe identifies as a significant economic and social problem.