The Ethical Responsibilities of Central Banks

In February 2021, governor Philip Lowe of the Reserve Bank of Australia made a dangerous statement. Lowe maintained that the central bank's board did not expect to increase its record-low 0.1 per cent cash rate until 2024 "at the earliest", meaning it might not come until 2025.

And then naively went on to say in September 2021 during a speech at the Anika Foundation, "I find it difficult to understand why rate rises are being priced in next year or early 2023"

Keep in mind New Zealand which is just across the pond from Australia and was one of the earliest advanced countries, started to increase official interest rates in October 2021. No less than a month after, Lowe doubled down on his delusion. In a review into the Reserve Bank of New Zealand (RBNZ), they concluded policy tightening should have started even earlier.

Are we to believe Australia's central bank didn't see inflation coming, that the economic data wasn't telling them to start increasing interest rates? If anyone has that kind of data, it's the RBA. Over at the RBA, they look at data with blindfolds on.

Captain Philip Lowe of the RBA Titanic was asked to answer some questions in parliament recently. One of the questions everyone has wanted to hear an answer to was the following:

You did say that it would be unlikely that would occur until 2024. I accept that's a caveated statement. But do you accept that the way that statement was broadly reported, which was without the caveats, had the effectively of inducing many Australians to take out mortgages in the belief that interest rates wouldn't rise until 2024? Now of course they're faced with seven months and potentially more of interest rate rises. Do you accept that you did in fact induce Australians to take out mortgages on the basis that interest rates wouldn't rise until 2024? And do you think you owe those people an apology?

And what was Lowe's response?

I'm certainly sorry if people listened to what we said and then acted on what we'd said and now regret what they have done. That's regrettable. I'm sorry that happened. But if I can just take you back to the situation we were facing in 2020 and 2021, the country was in a dire situation. At the Reserve Bank we wanted to do everything we could to help the country get through that.

Translation: I am sorry you listened to us. Go F*#k yourselves.

It's about one of the worse apologies you could ever hope for. Enough that it is perceived as an apology, but also enough denial that nobody could interpret it as an admission of guilt.

You thought Philip Lowe was laughing at you, you dumb poor pleb? You're wrong again. It looks like he is smiling, but here is proof that Lowe is sad and remorseful about giving you misleading advice.

See? No smiling here. Why do you keep misinterpreting and understanding this guy? This is why you're not the governor of the RBA earning a $1 million yearly salary erasing the middle class with your final decision-making.

We are talking about the central bank responsible for setting monetary policy and protecting the economy. Saying that you're sorry, people listened. It might not have been an absolute statement Lowe made in 2021, but it was enough that banks and markets alike interpreted it as not having to worry about interest rate rises for a while.

As a result of this advice, people went and borrowed money at low rates. Others already with mortgages and loans postponed fixing their terms to as close as 2024 as possible to maximise the amount of time they would have low rates. You could blame the people who borrowed based on this advice, but the banks, despite lending criteria designed to prevent a repeat of the 2008 GFC, lent it out because they were operating on the same 3% buffer and advice.

Now, if we are not supposed to make financial decisions based on the advice of our central bank, then whom? In terms of authority, you don't get any higher than an independent central bank like the RBA or Federal Reserve.

It highlights the ethical responsibility central banks have to their citizens. Not only in their decision-making policies but responsibilities to ensure the well-being of the sovereign citizens and the impact of their financial decisions. I think we can all agree mistakes happen, but when you're the main bank of a country, mistakes around messaging and fiscal responsibility are more dangerous.

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