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- The Reserve Bank of Australia (RBA) has flagged the need for ongoing and “very significant” monetary support in the aftermath of the COVID-19 crisis
- The bank said in the minutes for its February policy meeting that the global recovery from the coronavirus pandemic is likely to be “bumpy and uneven”
- The spread of the virus and the speed of vaccine distribution are the key determinants of how well global economies will recover
- Nevertheless, Australia has had a quicker recovery than initially anticipated, with the RBA predicting the unemployment has already peaked
- While wage growth is still low, the RBA said inflation is likely to remain below 2 per cent for quite some time, too
- Interestingly, Australian households saved more money than normal during the pandemic, meaning household balance sheets are currently strong
- This means even as support measures like JobKeeper come to an end, consumer growth is still expected to be positive in coming months
- Nevertheless, the Reserve Bank said significant monetary support is still necessary, hence the ongoing cash rate at a record low 0.1 per cent
- The RBA has also extended its quantitative easing program by agreeing to buy another $100 billion in government bonds
The Reserve Bank of Australia (RBA) has flagged the need for ongoing and “very significant” monetary support in the aftermath of the COVID-19 crisis.
The bank has released the minutes from its February monetary policy meeting where it made the call to keep the cash rate at its record-low 0.1 per cent and extend its quantitative easing (QE) program by $100 billion.
While the outlook for the Australian economy is certainly brighter than it was during the early days of the coronavirus pandemic, the Reserve Bank admitted the global recovery is still likely to be “bumpy and uneven” as the virus continues to spread.
At this stage, the spread of the virus and the speed of vaccine distribution are the key determinants of how well and how quickly global economies will recover.
Encouraging signs
Though Australia is certainly not out of the woods yet, the velocity of our economic recovery over the past few months has taken the Reserve Bank by surprise.
The bank said in stark contrast to predictions from just three months ago, it’s likely unemployment has already peaked in Australia and the nation will see a gradual recovery in coming months.
“Despite the end of the JobKeeper program in March creating some uncertainty for near-term labour market outcomes, the unemployment rate was expected to resume trending lower in the second half of the year,” the RBA said.
At this stage, the unemployment rate is expected to decline to around 6 per cent by the end of 2021 and reach around 5.25 per cent by mid-2023.
Interestingly, despite the havoc wrought on Australian consumers by the coronavirus and the spike in unemployment, household saving actually increased over the pandemic.
“Restrictions on consumption, precautionary behaviour and strong growth in incomes had contributed to households adding considerably to savings during the June and September quarters of 2020,” the RBA said.
While the bank admitted there is still some uncertainty around how quickly savings levels will return to normal and how households will use the extra money on their balance sheet, the bolstered consumer cash position bodes well for the economy as support measures like JobKeeper come to an end.
Even with roughly 1.5 million Australian set to stop receiving JobKeeper assistance in March, the RBA said consumption growth is still expected to remain positive in coming months, though growth will likely be moderate.
Though wage growth has fallen to its lowest level in at least two decades, the Reserve Bank said the negative effects of this lower wage growth will be offset by low inflation.
The RBA predicts underlying inflation will rise to around 3 per cent in the June quarter but then retreat and stay below two per cent for as long as wage growth remains low.
The RBA’s inflation target is between 2 and 3 per cent, though it’s unlikely inflation will stabilise in this zone for some time.
Support still needed
Though the signs of economic recovery are encouraging, the RBA said “very significant” monetary support is still required as uncertainty regarding the virus stays high.
As such, the Reserve Bank has opted to expand its QE program by buying an extra $100 billion of government bonds. The initial QE program, wherein the RBA also bought $100 billion of government bonds, is set to be completed in mid-April. The second program will begin immediately after the first.
The RBA said it would be “some years” before the goals for inflation unemployment were achieved.
