RBA Highlights Growing Inequality with Interest-Rate Defence
Phillip Lowe, Governor of the Reserve Bank of Australia (RBA), is facing public criticism for his decision to raise interest rates in order to curb inflation. Lowe has argued that high inflation is damaging and increases inequality, but his decision has caused a lose-lose situation for households with debt, as the increase in rates has made it harder for them to make repayments. Inequality is a bigger issue than just inflation, however, as Lowe’s salary is now one-eighth of the base salary of the CEO of the Commonwealth Bank, from which the RBA was created. This is a stark contrast to the past when the RBA governor’s salary was only one-eighth of the CEO’s.
Full Story – RBA’s defense of interest-rates highlights the truth about inequality
The fact that RBA governor Phillip Lowe is copping a rollicking pile-on complete with calls to resign is hardly surprising – this is the first big escalation in interest rates since the RBA became independent and since household debt went above 100 percent of income.
These things both happened in the mid-1990s and made interest rates a very big deal and entirely the fault of the RBA and its governor for the first time – so cop it, he must.
Now the household debt is 200 percent of income, one of the highest in the world, house prices have increased six-fold, and Treasurer Jim Chalmers has hung Dr. Lowe on the line to dry, reminding everyone most days that he’s independent.
In Senate Estimates last week, Dr. Lowe defended his use of the interest-rate mallet with the word “inequality”.
“High inflation is damaging and corrosive,” he said. “It increases inequality and hurts people on low incomes the most.”
Philip Lowe maintains his view that more rate rises will be needed to curb inflation. Photo: AAP
So let’s talk about inequality.
The first thing is that inequality is worsened by the responses to both low and high inflation; it’s a lose/lose.
When it was too low after the GFC, and the cash rate was cut to 0.75 percent before the pandemic and then 0.1 percent in 2020 to try to get inflation up to the 2 to 3 percent target band, that resulted in a huge increase in asset and land prices, enriching the already rich.
Now the rapid lift in interest rates from 0.1 percent to 3.35 percent, and counting to get inflation down to the 2 to 3 percent target, is worsening inequality because the indebted are struggling to make repayments and are becoming the working poor.
And as Dr. Lowe implied, rising consumer prices tend to hurt the poor more because their income is more likely to be fixed, and they spend a greater proportion of it on essentials.
But rising inequality has to do with a lot more than inflation, which has a relatively small, temporary effect.
There’s no better way to illustrate this than with Philip Lowe himself in the context of the history of the RBA.
Dr. Lowe’s salary in 2022 was $911,728 pa, which was one-eighth of the $7 million base salary, before bonuses, of Matt Comyn, CEO of Commonwealth Bank, from which the RBA was created. (CBA used to be Australia’s central bank until the RBA was spun out of it in 1959).
In 1992, when the Commonwealth Bank was eventually privatized, the salary of its CEO, David Murray, was a little more than $400,000, up from the $300,000 of his predecessor, Don Sanders.
By the way, those amounts would be $850,000 and $640,000 today, adjusted for inflation, not $7 million.
The salary of the RBA governor, Bernie Fraser, in 1992 was $290,000, about the same as Sanders’ wage and three-quarters of David Murray’s, not the one-eighth of Matt Comyn’s it is today.
And finally, in 1992, the RBA governor’s salary was eight times average weekly earnings while the Commonwealth Bank CEO’s salary was 11 times. Today, it’s 10 times AWE for Philip Lowe’s and 76 times for Matt Comyn’s.
The real ‘inequality.’
Does Matt Comyn work any harder than David Murray did, or Philip Lowe does now? Not. And although Comyn has added $50 billion in value to CBA since he took over in April 2018, not much of that was his doing. Murray arguably created more value by setting up the bank’s transition from public to private.
In any case, does Matt Comyn need to earn as much per month as David Murray and Bernie Fraser made per year between them to keep the wolf from his family’s door? Of course not.
So the big…