In September, Amber Daines and her partner will get a big shock.
Their mortgage repayments are about to increase by $3,500 a month, on top of increases they have already experienced after 12 back-to-back interest rate rises.
“We took out the loan with the idea [that] we would at least have three years to try and get some of that principle down before interest rates would change,” she said.
She was also comforted by the reassuring words of Reserve Bank governor Philip Lowe (at the end of 2020 and through most of 2021) — that rates were unlikely to rise until 2024.
Despite his assurances about rates staying low, the RBA ended up lifting rates at its most aggressive pace on record.
Since May last year, the central bank has lifted its cash rate target by 400 basis points (or 4 percentage points) in just over a year.
Ms Daines and her partner are self-described middle-class Australians with full-time jobs, who are confident they will be able to manage what comes their way.
But she questions the messages that regulators and policymakers give people that encourage them to take on too much debt.
Dr Lowe has since apologised to the Australian public and says he would have “chosen different language” in hindsight.
‘Disappointing’ message from the ‘smartest people’
Amid the escalating rise in housing, grocery, electricity and other costs, Ms Daines is thinking of selling one of her properties.
The couple have two mortgages – one is a mostly fixed (80 per cent), partly variable (20 per cent) rate on their home in NSW’s central coast, which they purchased for just under $1 million in July 2021.
The other is an interest-only loan on their original home in Gladesville in the Lower North Shore of Sydney – where they were living before the move to the central coast, but which is still mortgaged.
They are renting that out, but she says the rent is not going to cover the mortgage and they may be forced to sell it.
“That’s a pretty big deal — that was never the plan,” she says.
Ms Daines says while the RBA can not predict events like the war in Ukraine and other factors that lead to a spike in inflation, it is “disappointing” that the RBA gave the wrong message to the Australian people.
“Like many people, we borrowed based on the idea that [it] looked like the smartest people [were] making those decisions about the economy.”
A ‘really damaging’ signal if Lowe is reappointed
“I think there’s no doubt that [RBA governor] Philip Lowe should go,” said Steven Hamilton, assistant professor of economics at The George Washington University.
Dr Lowe started working for the RBA (in a junior role) in 1980. At the time, he was around 18 years old.
He has since spent most of his working life there apart from a brief stint (two years) at the Switzerland-based Bank for International Settlements.
Over the past five decades, he climbed the ranks to become the bank’s head of economic research, financial stability, domestic markets, deputy governor and, eventually, the RBA governor in 2016.
His term will expire in September and economists say it is unlikely the government will renew his employment.
If Treasurer Jim Chalmers were to extend Dr Lowe’s term, it would be “an endorsement of the myriad failures that have occurred under his watch”, Dr Hamilton added.
He also believes it would send a “really damaging” signal to the Australian people.
“How much faith do they have in this independent body that has such a profound impact on their lives, that no matter how badly they perform, they get to keep their job?”
The mistakes of Lowe and the RBA
Dr Hamilton argued the biggest error by Dr Lowe and the RBA board was their decision to be specific, by suggesting rates would remain low until “2024”.
“It’s very clear that they made a huge error in promising implicitly that rates would stay on hold for many years,” he said.
He believes the RBA board should have managed expectations better, by saying something more general like: “If the economy is still sluggish, we will keep rates low.”
Australia’s central bank has lifted interest rates at its fastest pace on record — lifting its cash rate target from 0.1 per cent (in May last year) to 4.1 per cent (earlier this month).
The RBA was also one of the last major central banks to start lifting rates, only just ahead of the European Central Bank.
By the time the RBA had started its rate-hiking cycle, many countries — like New Zealand, Canada and the United States — had already been increasing rates for several months.
“I do think Lowe should have started raising rates earlier,” said Gigi Foster, an economics professor at the University of NSW.
She said the massive government spending at the height of the COVID-19 pandemic (with subsidies like JobSeeker and JobKeeper), combined with prolonged lockdowns, led to inflation rising much earlier than the RBA governor had predicted.
“But if you compare his [Lowe’s] mistake to the mistakes of all the other leaders of Australia during this period, I don’t think it’s any worse.”
Last year, inflation in Australia jumped to its highest level in three decades.
Although consumer prices have been rising at a slower pace lately, cost-of-living pressures are expected to remain high for at least the next couple of years.
“The reason we have the inflation that we have is really fiscal (government), it’s not monetary (Reserve Bank),” Professor Foster said.
“The government ploughed money into the economy without a commensurate increase in economic activity, while also getting in the way of business everywhere,” referring to lockdowns in particular.
“If we’re playing the blame game, Philip Lowe would not be at the top of my list.”
‘Rubber-stamping’ the governor’s decisions
In July last year, Treasurer Jim Chalmers commissioned a review into the RBA to examine who sat on its board, its level of transparency, and how the bank made its interest rate decisions.
He released the report nine months later, and it turned out to be a fairly critical review.
There were 51 recommendations about how the central bank should function to better target inflation and employment, and be more transparent with the Australian people about its rate decisions.
“When they looked into it [the RBA review], they didn’t find that the board was overruling the governor necessarily,” said Dr Isaac Gross, an economics lecturer at Monash University and former economist at the RBA.
“But one of their big conclusions was that the board was not being given the tools to hold the RBA decisions accountable.
“So they had neither the information nor the expertise to really hold the decisions up to the light and say, ‘is this the best decision?’ Or ‘should we be considering an alternative policy?'”
The RBA governor has consistently pushed back against claims that he wields too much power over the board.
“I find sometimes that it’s all shed down to me, which is a bit unfair because it’s the board,” Dr Lowe told the Senate Economics Committee during his semi-annual testimony earlier this year.
“There are nine of us who make these decisions and we take them collectively.”
Who could be the next RBA governor?
Dr Hamilton said: “It would be crazy for the Treasurer to reappoint him [Dr Lowe]. And as a result, I’d be very surprised if he did.”
Many economists share his opinion, and are betting the most likely outcome is a new governor.
One of the leading contenders is RBA deputy governor Michele Bullock, who recently confirmed the bank expected to push the unemployment rate up to 4.5 per cent by the end of next year in order to lower inflation.
“Outsiders” are also being considered, like Treasury secretary Steven Kennedy and Finance Department secretary Jenny Wilkinson, and even former deputy governor Guy Debelle (who is currently working for mining billionaire Andrew Forrest).
“I think it’s much more important to get that general mix of expertise correct than to make a particular person out to be a scapegoat,” Professor Foster said.
“Scapegoating is a very Australian thing to do. And the Australian people are very easily led into blaming one person for the woes that have befallen the economy. And I just think that that’s disproportionate.”
“You still need people, even with diverse views, who have some expertise in monetary policy.
“Bring in people who are more steeped in the left, and more people steeped in the right — just a whole bunch of different people.”
There are some who argue that it’s too risky to change the Reserve Bank governor in the middle of a rate-hiking cycle, with inflation not yet under control, and that Philip Lowe should be given an extension.
Dr Gross strongly disagrees with that argument.
“If the Bank of England can change governors in March 2020, when the COVID pandemic is exploding out of control, I think Australia can probably change governors of the RBA when we’re just increasing interest rates 25 basis points at a time,” he said.
‘Very high risk’ paying off a mortgage
Amber Daines is expecting rates to go up further.
“I think it’s difficult to believe that we are done with interest rate rises,” she says.
“We are planning for the scenarios that [variable rates] will be 7 per cent by the end of the year.
“It means cutting back on everything. It may mean things like delayed retirement.”
She says the RBA needs to reconsider its messaging going forward, but people also need to think carefully about how much debt they take on.
“Buying a house is the biggest financial decision you’ll probably ever make, and so, you need to have some assurances you can afford that.
“Otherwise, the risk of not being able to keep that property remains very high.”
It is a risk they are now contending with.