Today marks the end of the first seven-year term of Reserve Bank of Australia Governor Glenn Stevens. He was reappointed for a further three years back in April by then Treasurer Wayne Swan. This was a glowing endorsement of the way Stevens has run the Bank and conducted policy in the most powerful economic position in the country.
In what may yet prove to be an important issue after the Abbott government, which will be sworn in tomorrow, Treasurer-elect Joe Hockey failed to endorse the reappointment of Stevens, accusing Swan of “severely compromising well-qualified candidates for senior independent regulatory positions”. Hockey accused Swan of “political game playing” even though he had no express examples why Stevens was not the best person for the role, nor did he offer any alternative names for the role.
Whatever these political machinations, it is worth looking at Stevens’ record over the seven years he has been governor.
It is difficult to find any qualified observer who would have anything but fulsome praise for the way Stevens has managed the policy settings over the last seven years, which has included a period of near global depression, a huge and unprecedented swing up then down then up and now down in the terms of trade.
When Stevens became Reserve Bank governor in September 2006, the annual inflation rate was 4 per cent with the underlying measure around 3.25 per cent. The economy was overheating, fueled by the first phase of the mining boom, severe capacity constraints brought on by a chronic under spending on infrastructure and a government consumption spending spree that was adding to inflation as private sector demand surged.
In his new role, Stevens hiked interest rates in November 2006 but then held off hiking again until August 2007, being blind-sided by a couple of low inflation results that turned out to be rouge numbers. With inflation accelerating towards 5 per cent, Steven had no option but to hike again in August 2007 and he followed up with three more hikes by March 2008 when the cash rate hit a now unthinkable 7.25 per cent. Such was the inflation mess inherited that Stevens was hiking rates when banks, housing and the economies in the US and UK were collapsing.
Not long after this, inflation fell and the world economy went into a tailspin.
This near depression was the true test of Stevens’ pragmatism and ability to react in a time of crisis. After a baby step 25 basis point cut in September 2008 when the global slump was unfolding, the collapse of Lehmann Brothers a few weeks later and the risk of economic depression saw the next four Reserve Bank meetings cut rates 100, 75, 100 and another 100 basis points in succession as the Bank worked with the government to fight the risk of not only a recession – which seemed certain – but something much worse.
In concert with the fiscal stimulus measures from the government, this monetary policy easing and sharp depreciation of the Australian dollar saw Australia avoid recession, even though the unemployment rose to a peak of 5.9 per cent in June 2009. This was a staggering success and against all expectations, including those of Stevens himself.
As the success of the policy stimulus became evident and as China and commodity prices recovered from the free fall, Stevens then shocked the market with the start of an interest rate hiking cycle in October 2009. Over the next 13 months, the central bank hiked on six more occasions meaning that in November 2010, the cash rate hit 4.75 per cent.
By the September quarter 2010, inflation had fallen back below 3 per cent, having spent the prior three years above the top end of the target range. That major error on inflation owes much to Stevens’ predecessor, Ian Macfarlane who seemingly succumbing to the political pressure of John Howard and Peter Costello when he obviously kept interest rates too low for too long.
It is worthy of note that for the past three years, inflation has been within the Reserve Bank target range and Stevens has prevented inflation falling below the bottom of the target range with the current monetary easing cycle which began at the end of 2011.
Stevens ends his first term with inflation within the Reserve Bank target, with the economy growing at 2.6 per cent and he knows there is lots of monetary stimulus in place which will no doubt spark a lift in economic growth to above 3 per cent during 2014. This should see the unemployment rate peak around 6 per cent and then fall back towards 5 per cent over the more medium term.
It looks like another successful policy cycle for Stevens.
Swan appointed Stevens for a further three years from tomorrow and if on September 17, 2016 inflation has remained, on average, between 2 and 3 per cent, if the unemployment rate is 5 point something and the economy has grown close to 3 per cent, as it has for the bulk of the past seven years, he will have continued his tremendous record.