JAMES GRUBER. Philip Lowe Has A Target On His Back.

It seems older Australians are beginning to link the RBA to low deposit rates and that may not bode well for Mr Lowe.

Recently, I had an unusual conversation with my mother. Like most retirees, she doesn’t follow business or finance news much, but certainly keeps a close watch on her own income and expenses. She made a passing comment about the awfully low deposit rates that she’s getting on her bank savings. I explained that the Reserve Bank of Australia (RBA) was deliberately keeping interest rates low to spur the economy and lift asset prices. Her reply surprised me: “Oh I know they’re to blame for it.”

Turning anecdotes into conclusions is not our caper but it does raise the interesting question about whether central bankers may turn from heroes to villains during the next downturn.

The RBA and its current governor, Philip Lowe, are held in extraordinarily high regard by the business community. And why wouldn’t they be? 28 years without a recession. The RBA’s quick actions – cutting interests rates by 100bps, expanding its balance sheet by 50% to provide liquidity for banks to lend credit, along with government guarantees for banking deposits and wholesale funding for commercial banks – are credited with helping Australia to ride through the 2008 financial crisis largely unscathed.

Central bankers outside of Australia are held in similarly high esteem. Former US Federal Reserve Chairman, Ben Bernanke, is deemed to have saved the world in 2008. A student of the Great Depression – where he believed authorities erred by not provided enough liquidity when that crisis hit – Bernanke flooded the US and subsequently the world with stimulus and bailed out many of the big banks, to get the global economy moving again in ’08.

Commercial bankers bore the brunt of public wrath for the crisis. Their ludicrous salaries, ridiculously speculative behaviour, combined with arrogance and greed, made them easy targets. In most people’s eyes, their actions caused the crisis and they deserved to be punished (strangely, not much punishment was meted out). The broader question about whether the low interest rates pushed by central banks spurred the speculative behaviour and action of commercial bankers as well as the extreme asset prices and debt attached to them, was never seriously addressed.

Even today, the current US Federal Reserve Chairman, Jerome Powell, moves stock markets with his every word and economists breathlessly wait for any guidance, or estimates, from the Fed. Sure US President Donald Trump criticises Powell but it’s largely a game of getting him to cut further interest rates to prop up the economy just in time for Trump to win another election.

But over the past few years, some questions have emerged about the policies of central bankers. Take negative interest rates. They started in Europe in 2009. First Sweden, then Switzerland and the European Central Bank (ECB), employed them.

Negative interest rates create, in the legendary parlance of TV hit Seinfeld, a “bizarro world”. They’ve clearly been disastrous for European banks, turning bank assets into liabilities. They’ve been bad for pension and insurance funds too. Low to negative returns can’t cover their costs, let alone make them a decent return. For the average person, there’s been widespread dismay at putting savings into banks or bonds and watching them drain away.

The penchant for negative interest rates seems to be waning though. Last year, then European Central Bank Governor Mario Draghi acknowledged stimulus measures have had negative effects and those effects are becoming more visible. It was an extraordinary admission from a man who once pledged to do “whatever it takes” to preserve the euro.

In December 2019, Sweden also ended its experiment with negative interest rates by raising the official rate from -0.25% to 0%. Savers rejoiced, until they realised they’d still be getting no interest on their bank deposits! More seriously, the Swedish central bank said inflation was close enough to its 2% target (at 1.8%) for rates to return to 0%.

In Australia, while interest rates haven’t gone negative, there’s certainly been talk about whether that needs to happen during the next downturn. Even with the current low rates, however, retirees are taking notice.

Philip Lowe admits he’s been getting hate mail from retirees:

“Some people find it appropriate to be very abusive. If people are rude to me, then I tend not to respond.

The typical letter would say, ‘I’ve saved hard all my life. I’ve tried to be conservative. I’m holding my money in term deposits because I don’t want to invest in the equity markets because I’m in my 70s or 80s or even older and I’m finding it very, very difficult.”

Even well-heeled retirees are feeling the pinch. Journalist James Kirby from The Australian newspaper, profiled a Sydney-based financial adviser Rodney Horin who has a wealthy divorcee as a client who owns a home with no debt and has $5m in savings. Even with those abundant savings, her investment portfolio can’t meet her own needs and that of her family with the current low returns on offer (she’s making about $70,000 when she needs about $120,000).

It’s clear low interest rates and miniscule bank deposit rates are impacting a broad range of retirees. And they see Philip Lowe trying to soothe their concerns while also talking about the possibility of even lower rates being needed during the next economic downturn.

It seems older Australians are beginning to link the RBA to low deposit rates and that may not bode well for Mr Lowe.

James Gruber is a businessman and writer. He authors a blog on Australian business issues, Money, Mobs & Moguls.

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2 Responses to JAMES GRUBER. Philip Lowe Has A Target On His Back.

  1. Paula Barrett says:

    It is quite clear that the constant cutting of interest rates has not succeeded in stimulating the economy. Rather, rate cuts signal that the economy is weak or why would it need stimulus. So people are holding onto their money or using the tax cuts to pay off their debt. At the same time, retirees and others who rely on bank interest income have had to curb their expenditure. They don’t earn enough to pay tax so didn’t get tax cuts and are finding life increasingly difficult.
    On the other hand, I agree with Sandra Hey that lowering rates has over-stimulated the housing market encouraging many to take on debt that leaves them vulnerable. All it takes for rapid defaults is a crisis as we are now experiencing. if people are out of work due to the virus and unable to make their mortgage payments, bankruptcies are inevitable and the whole economy will come crashing down. Given the impacts of the prolonged drought, catastrophic fires and now floods, the economy is unlikely to recover any time soon, although disaster reconstruction may have some positive effect. Nevertheless, it’s hard to see what government stimulus will reverse this. It;s all very well to give businesses tax cuts but that won’t encourage the general public to spend. The stock market has plunged to almost GFC levels wiping out the nest eggs of many self-funded retirees who have been forced to stay invested in the market because they simply can’t live on interest income at these low rates. In his recent National Press Club address, Lowe seemed to be aware of this state of affairs but then he goes and cuts the rates further last week, further fuelling the economic malaise. Yes, I understand there is pressure to follow global rates down but someone has to stand up and arrest this disastrous downward spiral. As we can see, a global race to the bottom has been a complete failure.

  2. Sandra Hey says:

    Philip Stevens took on the role as Governor of the Reserve Bank on the 18th September 2016 at that time Interest rates for a 12 month fixed term deposit for myself on deposits up to $100,000 was 3.17% – inflation rate for the same year at 1.30%. Since the appointment of Philip Stevens the Reserve Bank has been exercising a slow burn of interest rates to the latest bomb fire rate of .05% – inflation currently 1.80%.
    The Banks have passed the lasted interest rate adjustment from yesterday to borrowers that has culminated in a fire sale interest rate of .08% for fixed term deposits of 12 months up to $100,000.
    It is not surprising Australian pensioners including myself have been writing to Philip Lowe expressing their anger. I consider it is not the role of the Reserve Bank to throw vulnerable pensioners under a bus to give “A get out of Jail Card” to PM Scott Morrison. Philip Lowe as Governor of the Reserve Bank has become a victim to an Ideologically driven Morrison Government and by pursing an almost non existent interest rate environment is responsible for another bout of an over heated housing market culminating in more exceedingly dangerous level of debt.
    It appears Governor Philip Lowe is getting ready to fire up the money printing press flooding the market with fake valueless paper notes.
    Egon Von Greyerz recently quoted “ Time to learn to dance in the rain, there is a lot of rain to come” at the time of that quote Australia was not on fire.

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