RBA Governor Philip Lowe says economic shock caused by COVID-19 not as bad as first thought

The Reserve Bank of Australia says the economy has been more resilient than initially anticipated but ongoing support is needed while inflation remains stagnant and unemployment is high.

Speaking to the National Press Club in his annual address, RBA governor Philip Lowe said the recession sparked by the coronavirus pandemic was not as deep as first thought, with stimulus measures and a vaccine rollout boosting confidence.

“The development of vaccines in record time is clearly good news,” Dr Lowe said.

“It has reduced one of the big uncertainties and could provide the foundation for a vigorous and sustainable recovery in the global economy.”

Despite the upbeat outlook, Dr Lowe noted the road out of the global lockdown would be long and bumpy, with the central bank prepared for any setback caused by the highly volatile pandemic.

“This outcome is not assured – the global rollout of the vaccines faces challenges, and there are a range of other uncertainties about the global economy, including trade tensions,” he said.

“We hope for the best here, but we also need to be prepared for further setbacks in what remains a highly uncertain world.”

During question time, Dr Lowe claimed there would be some “job shedding” by businesses once the JobKeeper wage subsidy ends on March 31, but that would coincide with a period of uplift where there would be a considerable level of job creation within the labour market.

“I think it‘s saved many people their jobs and helped people in their lives,” Dr Lowe said of JobKeeper.

“I can understand why the government wants to stop that program as they said they would and perhaps have a discussion about whether there‘s an opportunity for more focused support in those industries which are still feeling very difficult conditions…”

The ceasing of JobKeeper is tipped to slow down the pace of recovery within the jobs market. Dr Lowe noted ongoing fiscal and monetary support would be needed while inflation remained below the target range of 2 to 3 per cent and the unemployment rate above 5 per cent.

The RBA is firm in retaining the cash rate at 10 basis points while a weaker labour market exists and forecasts point to subdued inflationary growth for some time.

“In the central scenario, it is expected to reach 6 per cent by the end of this year and around 5.25 per cent by mid 2023,” Dr Lowe said.

“The unemployment rate is higher today than it has been for almost two decades and many people can’t get the hours of work they want.”

The central bank on Tuesday retained the cash rate at 0.1 per cent but extended its bond buying regimen by $100bn beyond its initial expiry date in April, purchasing $5bn a week.

Bond buying is part of the RBA’s quantitative easing program introduced to assist in the resuscitation of the economy. It is implemented when interest rates are low and normal monetary policy levers are not as effective.

“It is going to be some years before the goals for inflation and unemployment are achieved,” Dr Lowe said.

“So it is premature to be considering withdrawal of the monetary stimulus.”

The bond purchase program has also been extended to prevent upward pressure on the Australian dollar. It also follows moves by central banks around the world that have extended programs until at least the end of the year.

Low interest rates are fuelling a surge in home lending, which is assisting in the rebound of the country’s residential markets.

“Higher housing prices can also encourage additional residential construction. But as housing prices rise again, we will be monitoring lending standards closely,” Dr Lowe said.

The RBA flagged it is yet to see a recovery in private investment, with public spending still being the main driver and “playing a strong counter cyclical role” in limiting the slump in the economy.

Household spending levels are an area the central bank is keeping an eye on, as stimulus payment measures ending in March could prompt a tightening in consumption.

“Normally, when income falls, so too does consumption. But we are not in normal times,” Dr Lowe said.

“The extra savings over the past six months and the bigger financial buffers can support future spending – people will have more freedom to spend as restrictions are eased and be more willing to spend as uncertainty recedes.”

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