Reserve Bank says increasing interest rates would come at the expense of jobs

The Reserve Bank of Australia says a premature hike in interest rates would come at the expense of jobs and would hinder the nation’s economic rebound from the coronavirus pandemic.

Fronting the House economics committee, RBA governor Philip Lowe said the country’s monetary policy should be promoting jobs growth domestically and should not be influenced by political pressures of setting rates higher compared with the global market.

Dr Lowe reaffirmed a “tightening” of the labour market was vital in boosting jobs and kickstarting a rise in wages, which are forecast to remain subdued while inflation sits below the central bank’s target range of 2 to 3 per cent.

“Meeting this condition will require a tighter labour market and stronger wages growth than we are currently forecasting,” Dr Lowe said in his opening statement. “It is difficult to determine exactly when this condition might be met, but based on the outlook I have discussed today, we do not expect it to be before 2024, and it is possible that it will be later than this.”

Questioned by Liberal MP Tim Wilson over why the governor is not trying to do more to ignite inflation through measures such as higher rates, Dr Lowe flagged intervening in rates would put upward pressure on the currency and constrain the jobs market.

“What I am doing is everything I can to encourage the creation of jobs … I see this as the fundamental issue,” Dr Lowe said.

“If we can create jobs the labour market will tighten up, firms will have to compete more for workers, they will have to pay higher wages and not only because of the labour market but productivity is lifting, and that will gradually lift inflation.”

The RBA on Tuesday announced it would retain the cash rate at 0.1 per cent but would buy an additional $100bn worth of government bonds as part of its extension of the quantitative easing regimen that ends in April.

Bond buying by the RBA assists in flooding the money market with more liquidity that can be circulated throughout the economy.

Labor MP Andrew Leigh asked why the RBA did not decide to double the size of the bond buying scheme to assist in a quicker inflationary rise; however, deputy governor Guy Debelle said doubling the size of assistance did not necessarily mean the recovery would be twice as fast.

“We haven’t ruled out further bond purchases after the program,” Dr Debelle said.

Dr Leigh, the deputy chair of the House economics committee, also questioned why the RBA had not conducted major external recruitment drives for senior management roles since the formation of the Spice Girls in the ’90s.

The RBA governor rejected the question, saying several external senior roles at the central bank had been appointed in recent years.

Central forecasts are pointing to the unemployment rate falling to 6 per cent by the end of the year and 5.25 per cent by mid-2023.

Gross domestic product is projected to rise 3.5 per cent over this year and 2022.

Dr Lowe said the central bank was keeping an eye of the tapering of government support schemes such as JobKeeper, which could prompt a tightening in consumption and spending behaviours by consumers.

“One issue that we are paying close attention to is how households respond to the tapering of the fiscal and other support measures,” he said.

“The fiscal response has supported people‘s incomes and boosted household savings, with the result that household balance sheets have strengthened noticeably. We are expecting these stronger balance sheets to support spending, but there are uncertainties in both directions here.”

The RBA noted the majority of funds obtained through the early release superannuation scheme remained in deposit accounts and would assist spending beyond federal government support.

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