Phil Lowe’s most dangerous idea

His accidental legacy to Australian monetary policy

Amid the flurry of commentary on RBA Governor Lowe’s replacement by Deputy Governor Michele Bullock, few seemed able to sensibly evaluate Lowe’s term in office. One of the main arguments for inflation targeting is that it provides a clear benchmark against which to evaluate the performance of monetary policy. Amid the many takes on Lowe’s departure, few bothered to reference this obvious and easily quantifiable benchmark. As Lowe himself conceded in an address to accountants in Wagga on 16 December 2021:

‘My main KPI is to deliver you an average rate of inflation of 2.5 per cent, and I'm falling short on that.’

The RBA actually benchmarks its inflation performance based on time spent in the target range more so than the average inflation rate. On that measure, Governor Lowe scores a lowly 11/100 (three quarters out of 28).

But the inflation target misses were symptomatic of a much deeper problem. Lowe had insufficient conviction in the effectiveness of monetary policy. This exchange from the House Economics Committee on 7 February 2020 nicely illustrates the problem:

Conditioning monetary policy on a Phillips curve relationship is a mistake, but even on its own terms, a flat Phillips curve is an argument for doing more with monetary policy, not less. Lowe’s argument failed either way you look at it. For reference, the US CPI inflation rate has fallen from 9% to 3% over the last 12 months while the US unemployment rate remains near cycle lows not seen since the late 1960s. Flat indeed. But that does not mean that monetary policy had no work to do. Just ask Jay Powell.