RBA’s Lowe Sees Higher Unemployment, Will Stay on Policy Course

Australia’s central bank chief Philip Lowe said unemployment will rise higher even with the recovery underway, and he’s satisfied with the impact of the policy package, but ready to do more if required.

In an address Tuesday that spotlighted the labor market and balance sheets, Lowe reiterated that restoring confidence is key to the recovery. The governor pushed back again on negative interest rates, as well as currency intervention; he also argued against monetary financing Down Under.

“There is no free lunch,” Lowe said of central banks financing government in the text of a speech, referring to proposals from luminaries including ex-Federal Reserve No. 2 Stanley Fischer. “This proposal is only relevant to the situation where high government debt constrains the ability of the government to provide necessary fiscal stimulus financed through the normal channels. Clearly, it is not relevant to the situation we face in Australia.”

The Reserve Bank of Australia in March cut interest rates to near zero, set a target for the three-year yield of 0.25% and began buying government bonds to soothe dislocated markets; it hasn’t had to purchase securities since early May. Lowe made clear that the key role going forward was fiscal support and argued the government has plenty of scope to provide this as needed.

The governor said the RBA’s balance sheet has swelled to around A$280 billion ($197 billion) from about A$180 billion prior to the pandemic and further increases are expected.

He warned about the risks of a prolonged crisis from the Covid-19 pandemic, noting that “the longer it lasts and the more uncertain things are, the harder it is to smooth out.”

The deeper and more protracted a downturn, the more severe the economic scars, he said, including young people not getting on the job ladder or falling off; people losing training opportunities; lower investment and research; and damage to society caused by long spells of unemployment.

The governor also pointed out the risks ahead to construction and professional services, which had been able to keep on employees in recent months due to a pipeline of work. “As new orders have declined, this pipeline is drying up. If it is not replaced soon, hours worked in these businesses will decline further,” Lowe said, citing RBA liaison.

Still , he said, many firms that were heavily affected by the lockdown are now rehiring and lifting hours, particularly in retail, hospitality and arts and recreation. But he warned of uncertainties -- in terms of health and personal finance -- cloud the outlook.

“The path ahead is expected to be bumpy and there are some major cross-currents in the labor market at the moment,” he said.

©2020 Bloomberg L.P.

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