RBA’s Lowe Says Economy Is Recovering, But Will Be ‘Bumpy’
(Bloomberg) -- Australian central bank chief Philip Lowe said the nation’s economy has turned a corner from its pandemic-inducted downturn, while reiterating that the recovery is likely to be a bumpy one.
Economic growth is expected to be “solidly positive” in the third and fourth quarters of this year and then expand 5% next year, the Reserve Bank of Australia governor told a parliamentary panel in Canberra Wednesday. Yet, unemployment is set to remain above 6% at the end of 2022, keeping wage and price pressures subdued, he said.
The outlook “cannot hide the reality that the recovery will be uneven and bumpy and that it will be drawn out,” Lowe told lawmakers. “Some parts of the economy are doing quite well, but others are in considerable difficulty.”
As Lowe spoke, data showed the economy returned to growth in the three months through September, expanding 3.3% from the second quarter. His testimony comes after the RBA initiated a A$100 billion ($73.8 billion) bond-buying program and cut interest rates to 0.10% in November, joining much of the developed world with zero rates and quantitative easing.
The central bank is trying to spur hiring as it begins the long march toward a tighter labor market that’s needed to drive faster wage growth and return inflation to its 2-3% target. The jobless rate is currently 7% and the RBA expects it to rise to close to 8% as Victorians resume hunting for jobs.
Yet there are plenty of positive signs in the economy. Consumer confidence has been surging and record-low borrowing costs have revived the property market.
While the RBA is paying close attention to property prices and household debt, “in the current environment, the bigger stability risk is a protracted period of high unemployment,” Lowe said. As households have been paying down debt over the past six months, “for the time being, the priority is employment.”
Here’s some other topics Lowe covered in his testimony:
- The pandemic has reinforced dis-inflationary trends in the global economy and that’s a key issue facing policy makers. Without a drop in unemployment below 5%, there won’t be wage hikes and inflation pressures. Still, the central bank is confident the inflation target can be met within the next half decade
- Lowe re-affirmed it’s “extraordinarily unlikely” interest rates will be cut into negative territory. The Federal Reserve, the Bank of Canada and others share his skepticism on negative-rate policy, and the collective wisdom of English speaking central banks is it’s not a road to go down
- Lowe noted the RBA’s recent actions mean the Australian dollar is lower than it otherwise would have been
- The central bank is keeping a close eye on the recovery in house prices, but isn’t worried about a rapid rise in values. Prices will be restrained by weak population growth -- the slowest since 1916 when thousands of soldiers were leaving to fight in the first world war
- The RBA has an open mind on the need to buy more government debt beyond the current program and is keeping a close eye on what overseas peers are doing. The central bank will have bought about 20% of Australian government securities on issue by the end of the program, he said.
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