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Reserve Bank Governor Philip Lowe made a ‘monumental mistake’ when he told the public that interest rates would not rise until 2024. Those words helped tip thousands of Australians into mortgage stress and could cost him his job
They are the four words that have forced the average Australian homeowner to fork out an extra $200 a week in interest payments. And they are the four words that could cost Reserve Bank Governor Philip Lowe his job, and his legacy. Interest rates, Lowe repeatedly said, would remain at historic lows “until at least 2024”.
Some say he’s now a dead man walking, likely to be booted when his seven-year term expires in September.
Michele Bullock, the deputy governor, is understood to be ready for the job, with a fresh face likely to be picked when Treasurer Jim Chalmers makes the call later this year.
Chalmers has already put the Reserve Bank on notice, ordering an unprecedented wideranging review.
That will be handed down in March with a brief of making sure that the independently run bank is doing its job.
Was Lowe incompetent, a victim of changes in the global economy or simply naive about how people would react to his comments?
He first made those comments on February 2, 2021, and then had that phrase in his key messages throughout that year.
Lowe wanted to avoid going from a 0.1 per cent cash rate into negative interest rates, where the bank actually pays people to take its money.
He was trying to get people to spend money, reduce unemployment and increase wages.
The comments unleashed a wave of property spending.
Almost 600,000 properties changed hands in Australia in the year to August 2021 – the highest number of sales in decades.
Sources close to the Reserve Bank say that phrase has haunted Lowe, as Australians made 30-year commitments based on his word.
“He had caveats, he said it (the cash rate) was likely to stay at 0.1 per cent but once you put a date on it, that’s what everybody hangs off,” the source says.
“Ordinarily, experts are a lot more vague with their statements. He should have known what was going to happen.”
Near free money was locked in for three years, or so people thought, with renters becoming homeowners for the first time and many people locking in eye-watering million dollar mortgages.
At 2 per cent, which was what retail banks were charging customers, investors were getting much more in rent than they were paying in interest.
Lowe was wrong, very wrong.
He pulled the pin of the interest rates hand grenade in May 2022, hiking interest rates by 0.25 per cent, two years ahead of his prediction.
The war in Ukraine increased petrol, gas and electricity prices. And at the same time,
The people who are trying to get ahead, who took the advice, took out a loan … now they are the ones who are hurting
Australia was hitting its lowest unemployment rate since 1974. The low interest rates had worked too well.
Australia was also waking up to the reality that the economy is underpinned by an unending wave of migration, which filled lowpaying jobs and kept prices down.
Cafes are still struggling for staff, events are at risk of cancellation because there are too few security guards, and the health sector has a worker shortage.
At the same time, building material costs soared.
Bushfires in 2019 and 2020 razed 130,000 hectares of plantation forest – the trees we use to make housing frames.
Steel, another key component of frames, particularly for double storey houses, also climbed 42 per cent, partly due to the Ukraine war.
The super-cheap money, and the federal government’s Homebuilder incentive scheme also surged demand for new homes, with an extra 67,000 homes started in 2021.
It was the perfect storm, fuelled by those four words. Lowe has apologised to people who took him at his word.
“I’m sorry that people listened to what we’ve said and acted on that and now find themselves in a position they don’t want to be in,” he said in November 2022.
“But at the time, we thought it was the right thing to do, and I think looking back we would have chosen different language.”
That grovelling apology was made at an economics committee hearing in Canberra.
Garth Hamilton, a former engineer who is now the federal Liberal National Party MP for Groom, which covers Toowoomba in Queensland, sits on that committee.
The Reserve Bank boss is due back in front of the committee on February 17.
Hamilton’s office has been flooded with people concerned about how they will pay their mortgages.
“The RBA has made an error saying they weren’t going to raise interest rates until 2024. That call by the Governor was just extraordinary,” he says.
“I don’t think the Governor was talking to middle Australia when he gave his advice; that was corporate talk.
“The people who were hurt by that call were aspirational Australians. The people who are trying to get ahead, who took the advice, took out a loan and now they are the ones who are hurting.”
Hamilton is in Opposition. He will not be in the room when Chalmers makes his decision on who should run the RBA from September.
But if he was in the chair, he said he would not automatically renew Lowe.
“To be fair, the Governor did see us through a rough spell with the pandemic but he made a big mistake and it might yet prove too big a mistake to come back from,” he says.
“It’s the Treasurer’s call but the Governor has only six months to turn it around.
“Saying rates won’t rise until 2024 was a really big black mark on his record.”
Sam Wright, an accountant from Toowoomba, said Lowe dropped the ball.
“The RBA has a bit to answer for around expectation management,” he says.
“Do I think Philip Lowe needs another term? A fresh face, a new perspective is needed. Someone who can better manage expectations. “A circuit breaker would be a fresh face.” Wright said he accepted that inflation, which was at more than 7 per cent, had to be curbed.
But he questions how the RBA made such a monumental mistake in their guidance.
“You needed to raise rates to curb inflation but people with an average house price are now paying an extra $10,000 a year in interest, and that’s before principal repayments,” he says.
“The RBA are smashing the demand side of the economy when the real problem is the supply side of the economy, labour shortages and material shortages.”
But how does Lowe, who earns more than $1m a year and lives mortgage-free in a $4m home in Randwick in Sydney’s inner city. understand what it’s like to live week-to-week?
Has he ever walked into the Aldi in Roselands in Sydney’s southwest and seen people putting products back on the shelves when they can’t afford them at the checkout?
Sarah, who asked for her name to be changed, had to take out a second job to pay her mortgage on a $1.14m home in Punchbowl, just nearby that Aldi.
She’s now working as a disability support worker on top of her full-time job as a teacher.
“Every time I look at my interest rate I have a heart attack, so I don’t look at it anymore,” she says.
Her rate has gone up to 5.24 per cent, adding about $400 a week to her repayments.
The 26-year-old is living with family and renting the property out, but the mortgage takes all of her full-time wage.
The second job is for spending money and catching up for coffee with friends.
The hike in repayments has hit property prices. They are going down across the country.
Lowe predicted they would fall as much as 10 per cent.
National Australia Bank chief economist Alan Oster was more pessimistic.
“We’re forecasting 0.7 per cent growth in the calendar year 2023 and 0.7 per cent in 2024,” he says.
“Unemployment is going to go up a bit but not excessively. Property prices are down 6 per cent in 2022, they will go down another 15 per cent this year.
“Part of the dynamic is how will it all end, it’s a slow burn and will not be felt in full until the back of the year (2023).”
So for people like Sarah, there’s a real risk that the property they bought in 2021 will be worth less than they paid for it by the end of 2023. That’s a catch-22. If they sell, they will lose any deposit they had saved and be priced out of a home for decades. But what if they can’t afford the higher repayments?
Banks were factoring in a buffer of 2.5 per cent on loans processed in early 2021 – but rates have gone up in real terms by much more than that.
But not everyone bought in the past 12 months. Those who have held on to their homes for years were able to either holiday to Europe or put in a pool.
If they didn’t splurge, they have probably paid down a fair bit of their home.
Many of those who had held on to their homes had also fixed their rates.
NAB has $108bn in fixed rate loans, with four out of five of those loans due to revert to variable rates in the next two years.
More than half of those loans were taken out after October 2020, when rates were about 2 per cent. That exposes one of the problems for Lowe’s strategy.
Many people with mega mortgages have not paid a single cent more since rates began climbing in May last year.
To tackle inflation, Lowe had to take a sledgehammer to the budgets of people on variable rates, because he would not be able to touch those on fixed rates until they expired.
Oster, who did his Masters at ANU in 1982, says Lowe had not finished yet.
“We’re predicting another 25 basis points in March and then that’s it,” he says.
“I don’t think they are crashing the economy but things are changing, we expect rates will be on hold and then start to fall in early 2024.
“Not everybody has paid higher repayments, there’s a big cliff of the fixed loans to mature.” He says Lowe deserves a pass mark.
“My observation is that they could have gone a bit slower but compared to other central banks, they have been OK,” he says.
“We’re calling a 60-40 no to a recession in Australia.
“In the UK, Europe and the United States we’re predicting zero or negative growth.
“Australia has the weakest growth rate since 1993 and that’s when we were coming out of a recession.”
Evan Dwyer, managing director of lender Red Zed which targets self-employed people, says his customers are feeling the pinch.
“We are hearing them talk about finding it much more challenging.
“This hasn’t had time to translate into mortgage stress or forced sales but it is clear we are heading into a tougher cycle,” he says.
Dwyer says the Reserve Bank was “deeply qualified” and that it could not be held to account for the war in Ukraine and federal and state government policy decisions.
“My only challenge is, considering over two million Australians are self-employed, it would be good to see a broader range of opinions and experiences on the Board,” he says.
This housing crisis comes amid predictions that Australia’s population will hit 30 million by 2033.
No one seems to know where they are going to live, who will build the houses or apartments they live in, or how they will be able to pay for the increased costs of timber and steel.
There’s no doubt that Lowe made a mistake, the question remains whether it will be fatal to his chances of hanging on for another term as governor.
For Australians under 30, inflation has never been an issue.
If anything, prices have been going down on household goods for decades as China became the world’s most efficient factory and streamlined shipping reduced transport costs.
Toy remote controlled cars used to cost $100 in the early 1990s, now they can be picked up at Kmart for as little as $15.
“Australians have little idea of what inflation can do to an economy.
Venezuela has an estimated inflation rate of 305 per cent – millions there are in poverty because of the government’s spectacular failure over monetary policy over the past two decades.
The UK has had inflation of more than 10 per cent. Heating bills climbed 50 per cent until the government intervened to set price caps. Rent went through the roof too.
Lowe says he will be the white knight to slay the inflation dragon.
He has categorically ruled out quitting. Prime Minister Anthony Albanese says he has his full support – which sounds like what AFL club presidents say just before they sack their coach.
“I know there have been calls for me to resign. I have no intention of resigning,” Lowe said in December 2022.
“It’s a responsible job and I intend to do it. We’ve got to get inflation down and that’s my focus and I will keep doing that at least until September.”
Lowe has worked at the Reserve Bank for 43 years.
Whether he stays on for another sevenyear term to crack the half century is now out of his hands.
Those four words “until at least 2024” may cost him $7m in lost wages.
There will be little sympathy from homeowners struggling with mortgage repayments if he does get moved on.