Dr Philip Lowe: Interest rates alone can’t conquer Australia’s cost of living crisis

Australia is obsessed with interest rates like no other country, and it is distracting us from tackling more pressing challenges, like productivity, that would have a greater impact on the cost of living crisis facing many Australians.

That's the view of former Reserve Bank Governor Dr. Philip Lowe, who spent 43 years working at the RBA, including seven years in the top job from 2016 to 2023.

Dr Lowe believes the current policy settings from the RBA are suitably restrictive with risks remaining, and the battle to tame inflation hasn't been won. Lowering interest rates may ease some of the pain households are feeling, but it isn't the silver bullet many perceive it to be.

"It's true that higher interest rates restrain aggregate demand; let's say they're taking 1% off the level of aggregate demand at the moment," explains Dr Lowe.

"In the last six years, there's been no productivity growth in the country. And we thought six years ago it was going to average 1.5%. So you accumulate that, and the level of potential output today is 8 or 9% below where we thought it was going to be.

"So maybe interest rates are taking off 1% of demand, the accumulation of the lack of productivity growth is taking off 8%. So that dwarfs the effect of interest rates. So the lack of productivity growth is the source of the cost of living crisis that people talk about."

An obsession with short-term rates

Dr Lowe and the Reserve Bank faced fierce criticism and media backlash for the aggressive strategy of hiking rates in order to curb inflation. The biggest point of contention centres around the communication that came from the Reserve Bank with regard to their estimates of how long interest rates would remain at emergency levels.

"In Australia, there is more public and immediate discussion of interest rates than in any other country around the world by orders of magnitude," said Dr Lowe.

"I hadn't fully appreciated the implications of that when I made these conditional statements about, well, if we don't think inflation's going to pick up back to target until 2024, and we'll keep rates low."

"But I didn't communicate that effectively enough in this kind of environment where there's hypermedia and political focus on it."

Dr Lowe says the strategy, whilst unpopular, appears to be on track, with inflation heading back to the target range. His view is that rates remain in restrictive territory, and with inflation still above the target range and lingering risks to the upside, policy settings remain appropriate.

RBA review a missed opportunity

It seems certain that the communication misjudgement ultimately cost Dr Lowe his job, with Treasurer Dr Jim Chalmers announcing a comprehensive review of the RBA's structure, decision-making process, and transparency in July 2022. Chalmers adopted most of the recommendations handed down by the review, including routine press conferences following each of the RBA's interest rate decisions.

Dr Lowe put his hat in the ring to retain his role as Reserve Bank Governor but was ultimately overlooked and replaced by then Deputy Governor Michelle Bullock. Dr Lowe says he holds no beef with the process of conducting a review nor the fact that he wasn't reappointed as Reserve Bank Governor.

"I would've hoped to continue because I enjoyed the job, and I thought the bank was doing a very good job. We're highly respected globally, and I wanted to see inflation return to target. But I perfectly understand the government had a different perspective, and there's nothing untoward about that, so I don't criticise that. It's perfectly fine," explained Lowe.

Dr Lowe does, however, express disappointment at the narrowness of the review, which he describes as a "missed opportunity" to look at a range of issues that he believes are much more important to our living standards.

"There are much bigger issues that have been left on the table that are much more important to our living standards than how often the central bank meets and whether it does a communication or speech. There are much bigger issues that got left on the table that just aren't being addressed," argued Dr Lowe.

Listen to the full interview

Dr Lowe grew up in the country town of Wagga Wagga, better known for its long list of sporting champions. Dr Lowe worked his way through school, securing a job at the RBA as an 18-year-old and kicking off his 43-year career at the central bank.

In this episode of Success and More Interesting Stuff, Dr Lowe discusses the lessons through his RBA journey and shares his thoughts on some of the pressing economic issues of 2025.