Australians are obsessed with interest rates because “there’s not enough else to talk about”, says former Reserve Bank governor Glenn Stevens.
Stevens, now chair of Macquarie Group, raised the ire of the Howard government when the independent RBA lifted its cash rate target only a few weeks before the 2007 election, which was won comfortably by opposition leader Kevin Rudd.
But Stevens told an RBA historian in newly released material that he still didn’t “really have a good answer” for why interest rates are “such a topic of political discussion in Australia”.
“I think the problem is there’s not enough else to talk about seriously. The UK has floating rate mortgages too and interest rates are a topic of discussion there politically, but so is the Middle East and a bunch of other stuff that the UK, as a bigger country, is sort of involved in; and of course, in America there’s so many other things to talk about,” he said.
“But here, in little old Australia, what are we going to amuse ourselves with? We’ve got a lot of media capacity and not enough real news to fill it. That used to be my answer anyway – and I still don’t have a better one.”
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Stevens, a reluctant public figure during his 10-year stint in the top job ending in 2016, was the occasional target of bruising tabloid criticism, most memorably when interest rate rises led Sydney’s Daily Telegraph to describe him as “the most useless banker in Australia”.
Reserve Bank officials have consistently maintained that interest rates are not to blame for chronically unaffordable housing, with homes averaging $1.5m in Sydney and only 14% of properties for sale nationally affordable for a household on the median income.
But in his interview, conducted in February 2024, Stevens said fears of supercharging asset prices through the 2010s played a pivotal role in the decision not to follow the example of many overseas countries and push the cash rate to zero, despite inflation staying consistently below the RBA’s 2-3% target range.
“I thought about it a lot, a lot,” he said.
“I think the evidence of the past, the period really since the Japan bubble burst, through the GFC, and even into the last couple of years, has yet again demonstrated that asset valuations, leverage and movements in those things are very important.”
Stevens argued that while “we know roughly” that inflation should be around two-point-something, there is no equivalent idea for where asset prices should be.
“With asset values, what’s the right value of the ASX 200? It all depends; what’s too big a rise or fall in that price over a year?
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“Property prices are a bit the same. It can be problematic, but it’s harder to pin down what the correct number is, so you wouldn’t make it a target I don’t think, but you can’t ignore it.”
All five of the governors and deputy governors interviewed by the bank’s historian agreed that the inflation target had broadly served Australia well.
In a separate interview, Stephen Grenville, who held the No. 2 job at the RBA in the five years to 2001, said: “We had two decades where it worked well and one decade where, in my view, it didn’t work so well.
“It worked well until 2010 – [the post global financial crisis] period − and I think it showed its great virtues.”
Grenville said there was evidence that the impact of monetary policy had been exhausted, and that interest rate reductions were pumping up asset prices but doing little to spur the economy.
“I think that’s an unresolved issue of the inflation targeting framework; [it encourages policymakers to go on reducing interest rates whenever inflation is too low],” the RBA’s transcript of the interview shows.
“I don’t think it actually mattered that inflation was running at 1.5% − we weren’t deflating, so we could have just not worried about it − but because you’ve signed on so rigorously to inflation targeting, it’s very hard to say, ‘Oh look, conditions are a bit different now, 1.5 is OK, isn’t it?’.”