Interest rate anger unlikely to shift RBA governor Philip Lowe

In his scheduled appearances before the Senate Economic Legislation Committee today and the House of Representatives Economics Committee on Friday, Dr Lowe is set to come under intense questioning from MPs over the significant financial stress being felt by families following nine consecutive interest rate hikes.

To some extent, this is stock in trade for a central bank governor.

When inflation ignites, there is little option but to wield interest rates - as blunt as they may be - to tame price pressures.

The RBA has already implemented nine consecutive rate hikes and Dr Lowe indicated last week that at least two more may be necessary before the central bank is satisfied that enough has been done to bring inflation down. Markets expect the rates to hit 4.1 per cent by July.

These increases are causing plenty of pain.

Stories abound of the dire straits many are finding themselves in under pressure from increasing energy prices and other living costs. More will soon feel the stress when 800,000 fixed-rate mortgages expire and are replaced with much higher variable rates.

Consumer spending is slowing and gloom about the current state of household finances is deeper than at any time since the 1990s recession.

KPMG Australia chief economist Brendan Rynne reckons if rates rise as expected, household spending will be down by $20 billion this year, shaving 1 per cent off gross domestic product.

Not surprisingly, much of the anger and frustration people feel about the financial pressure they are under is being directed at the governor. In many ways, that is the job.

As Westpac senior economist Matthew Hassan points out, having the power to make and stick by such unpopular decisions was a key reason why the Reserve Bank was granted independence in the first place.

Who but an independent authority would have the resolve to play the bad guy and see such a painful policy through to its successful conclusion?

Dr Lowe is a very experienced central banker and was well aware of the hot seat he was occupying when he took over from Glenn Stevens in September 2016.

But by his own errors Dr Lowe has made his situation worse, not least his ill-judged remarks in 2021 that interest rates were likely to would remain low until 2024.

As a 2008 Senate inquiry into Reserve Bank independence observed, "when interest rates are high and rising, making a scapegoat of a central bank Governor could be quite politically popular in the short term".

But, as intense as the pressure is on Dr Lowe, it is highly unlikely that calls for him to quit or be sacked will come to anything.

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It would be a huge step for any government to move against the governor of an independent central bank, and would likely trigger a savage reaction from markets that could cause the dollar to plunge and bond yields to soar.

And under changes passed by parliament in 2008, the government no longer has the power to dismiss the governor. That now resides with parliament.

Dr Lowe has flagged he would like to continue in the role when his current appointment expires in September. But even if he wanted to resign, the political and financial fallout could be just as dire as being dismissed because of inevitable suspicions that he had been forced out.

The next seven months could be uncomfortable for both Dr Lowe and the government.