RBA’s Lowe says rapid recovery possible

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

 

Reserve Bank governor Philip Lowe believes it is possible the Australian economy could perform better than the central bank is predicting if there is further good news on the COVID-19 vaccine front.

But in a speech on Monday, Dr Lowe also warned there is still considerable uncertainty about the outlook and an extended period of higher unemployment is likely to be a casualty of the first recession in almost three decades.

The Reserve Bank is expecting the unemployment rate to peak at just under eight per cent by the end of the year, compared with 6.9 per cent in September, and will still be a little above six per cent at the end of 2022.

“It is certainly possible that the economy will do better than this baseline scenario,” he told the Committee for Economic Development of Australia annual dinner.

“If we do get further good news on the health front, we could have a rapid rebound.”

Even so, population growth is forecast to record its slowest rate since the First World War.

“It remains hard to predict when the borders will open again and when they do, what rate of new arrivals will be,” Dr Lowe said.

Population growth is one factor in a complex picture for the housing market, which is also simultaneously adjusting to a recession, record low interest rates and substantial government incentives to support residential construction.

At the same time, the pandemic has changed the way people work, shop and live.

“So there are a lot of moving pieces at present and the effects are very uneven across different types of property and across the country,” he said.

He also suspects people will be more cautious in their borrowing and spending and will want “bigger buffers” in future in case things go wrong.

However, the pandemic has helped to speed up the digitalisation of the economy, boosting productivity which will help drive future economic growth.

He reiterated the central bank will not lift interest rates until actual inflation – rather than forecast – is sustainably within the two to three per cent target band, which will need materially higher wages growth than it is currently.

“This will require significant gains in employment and a return to a tight labour market,” the governor said.

In the Reserve Bank’s round of monetary policy easing earlier this month; which took the cash rate to a record low 0.1 per cent, it also entered into a $100 billion bond buying program known as quantatitive easing or QE.

Dr Lowe explained the affect of QE provided long-term, risk-free interest rates, while adding liquidity in the financial system.

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