Central bank governor of the year 2002: Ian Macfarlane – Luck and a lot of good judgement


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Ian Macfarlane points to the dynamism of Australia’s economy, neglected by a market that went hi-tech mad, as part of the reason for his success at the Reserve Bank of Australia. But he’s made a few good calls of his own.

When Ian Macfarlane, governor of Reserve Bank of Australia, is told that he is Euromoney's central bank governor of the year, it's as if he has been told something self-evident. But he quickly points out that he doesn't deserve to take all the credit. "If the award is for the performance of the country and for the bank, then I am not surprised," he says. "Because the numbers coming out of Australia have been so good for so long that I feel that Australia is due some recognition."

Good is an understatement. The numbers are exceptional and have been for 11 years. Since 1990, Australia's average annual rate of growth has been 3.4%, faster than any other OECD economy of comparable size. Among developed economies, Norway is next most impressive at 3%. The one economy that left them all standing is Ireland's, which in the same period has an average annual growth rate of 6.3%.

Today, while many central bank governors help to fight rearguard actions against recession, Macfarlane continues to steer an economy that boasts growth rates of more than 4%. It's an enviable position. And central bank governors that can claim, as he can, that their economies over the past year did better in relative terms than ever before are few and far between.

According to private-sector economists, Macfarlane shows an ability to identify risks before they materialize and to act promptly before they become dangerous - something that puts him head and shoulders above his peers. As one economist puts it: "His call on the economy has been exceptional. He is aggressive and pre-emptive."

Macfarlane's foresight enables him to make a virtue of not being a follower and not being pressured into making decisions.

"We did not depart from our timetable," he says when asked to comment on the Reserve Bank of Australia's actions following the terrorist attacks on September 11.

The Federal Reserve Bank and the European Central Bank both eased rates immediately and the Bank of England followed the next day. Macfarlane stuck to his guns. "A steady hand was needed. But I think the worst thing we could have done would have been to move the day after everyone else," he says. "It would have shown we weren't in the club and that we were lagging on our heels trying to imitate them. So I actually think that considering our economy was so strong, it was the best thing to do at the time."

In fact he had already been cutting rates and while others dithered, Macfarlane cut interest rates twice more in quick succession towards the end of the year. It was obvious to him that 2002 was going to be tougher than many expected. He was right. The cumulative 200 basis points of cuts - from 6.25% in February 2001 to 4.25% in December - insulated Australia from the worst effects of the global slowdown. Consumer sentiment remains buoyant, the property market vibrant and business investment is robust.

Unlike at other central banks, there are no more discussions about future rate cuts in Macfarlane's meetings. Quite the opposite. Debate centres on damping down inflation - now at 2.8%, towards the top of its 2% to 3% band - and making rate rises that will stop the economy running out of control and overheating. Macfarlane announced two 25 basis point rate rises in May and June, bringing rates back up to 4.75%.

"This is a vigorous economy," he says. "It wants to get up and grow so you don't have to entice it." And despite rates in Australia being higher than in any other of the world's advanced economies he has no qualms about raising them again. "If you ever get to a point where you don't get criticism for putting interest rates up, you can be pretty confident that you are six months late," he explains.

No boom, no bust

Luck is a word often used when the Australian phenomenom is discussed. After all, how else could Australia still be growing so strongly while other countries are staring into the abyss? Macfarlane admits that fortune has smiled kindly on the country. "Normally, when a country has had a long period of expansion, people get overconfident. It happened in the US and elsewhere. It didn't happen here, so in that respect it was good luck."

And he seems quite satisfied that, as he puts it, Australia went completely out of fashion. "When we were vulnerable to a late expansion excess everyone became obsessed with the new economy and the international investor lost interest in us," he says. "So we didn't have the equity price boom like everyone else. Nor did we have the boom in fiscal investment with everyone digging up the country and putting cables down. So because we didn't have the boom, we didn't have a reaction to it."

Although things are going so well, Macfarlane admits that it can be difficult to turn off and forget about the pressures of his job, especially when there is turmoil in the foreign exchange markets. It's a reference to when the Australian dollar hit new lows against the US dollar in April 2001, which Macfarlane describes as an uncomfortable time.

The decline in the Australian dollar first started during the Asian crisis in 1997: something that Macfarlane says was quite logical. However after recovering much of its value during the next two years the currency went on the slide again. By April 2001 it hit A$0.47 to the US dollar. "It was uncomfortable because we couldn't explain it," he says. "A lot of people scratched their heads about it, but most of the explanations were intellectually unsatisfying." With hindsight, Macfarlane believes it was due to the interest of investors in the new economy and the technology sector. He adds: "It was a year late because the infatuation with the new economy should have stopped in March 2000 when the Nasdaq peaked. But the attitudes persisted for another year."

In the end, however, the Aussie dollar's weakness was an important lifeline. Australia's exports remained extremely competitive and it avoided the slump in demand suffered by other countries. "People have often said that the way we rode external shocks was because we were assisted by the falling Australian dollar," Macfarlane says. "And there is some truth to that. But no-one likes to see their currency go down below what you think is a reasonable value."

Macfarlane grew up and studied in Melbourne, where, as he casually puts it, he did a couple of degrees in economics. Following graduation, he headed for Europe. After an 18-month stint in Oxford, he started work at the OECD in Paris. "In the '70s it was a very important institution," he says. "It was, at the time, the only macroeconomic forecaster. The IMF hadn't started and the big investment banks hadn't started. So the OECD was the only place where everyone got together to talk macroeconomic development." He adds: "The place also gave me an international perspective."

In 1979, after six years at the OECD, Macfarlane decided that it was time to return home. The idea of being an expatriate all his life was unappealing. Taking a cut in salary, he started work at the Reserve Bank of Australia: 17 years later he was made governor.

One year after his inauguration, the Asian economies - including many of Australia's most important trading partners - collapsed. Macfarlane says: "Something was happening that wasn't widely understood around the world. The Americans didn't really know what was going on and so we had a very different perspective from the US and Europe. Also, because Australia didn't suffer it was the first time when we had international attention realizing that Australia was doing a lot better than they thought. In fact they were pretty amazed by how well we were doing."

When Macfarlane does get time to escape from central banking he engages in what he calls pretty conventional stuff. It includes going to the cinema and golf. But he remains tight-lipped when pushed to state his handicap. There is a suggestion that he's not particularly good at the game. His excuse? "I think it would be bad if my handicap was very low because it implies that you haven't been working hard enough." He then has a gentle dig at other central bank governors. "They do have a central bank tournament at the BIS annual meeting," he says. "And it is always won by an Asian governor."

When not looking for lost balls and shouting "fore", he has a keen interest in economic history - that of the mid-20th century in particular. "It's interesting to read about the mistakes, why they were made and how long it took to rectify them," he explains.

So is there a temptation for Macfarlane to leave his job at the top before he makes mistakes that need rectifying? He laughs at the suggestion and says that he doesn't believe that anyone is that calculating. "I think that anyone who is appointed as central bank governor will see that seven-year term out. And if you are young enough to do another one you will think about doing another one. So you see it in terms rather than points of time."

He refuses to be drawn on whether he will indeed throw his hat into the ring for another seven years when his term draws to a close in 2003. "I haven't committed myself either way and I am still thinking about it," he says. If his past record is anything to go by, other officials at Australia's central bank will probably try to grab his hat and throw it in for him.