RBA governor says interest rates may have to stay low ‘for years’ as economy recovers
RBA governor Phil Lowe said the outlook for Australia’s economy had improved since the peak of the COVID-19 crisis in April.
In a conference call this morning with the Senate Select Committee, Lowe said it was “entirely possible” that economic growth could return faster than expected.
However, he said the outlook was still a “complex picture, with some parts of the economy doing better over recent weeks, and other parts not doing so well”.
“As the pipeline of pre-existing work starts to be run down there may be further declines in jobs, but it won’t be as stark as what we saw in April,” Lowe said.
However, to get the economy back to full employment, the RBA may have to keep interest rates where they are “for years”, he said.
Lowe said that when the RBA released its quarterly policy statement in early May, it was expecting a decline in total hours worked across the economy of 20 per cent.
Since then it’s been “progressively revising that number. There’s no firm estimate, but we’re hoping it will not be a decline of more than 15 per cent”.
Lowe said the 15 per cent fall was still a “staggering” amount, but as new data had come in the bank had still been able to revise its view on the scale of the downturn.
Local stocks continued their recent rally while Lowe spoke, with the ASX Small Ords Index starting the day almost 2 per cent higher.
Looking ahead, Lowe reiterated his oft-repeated call for fiscal policy to play a larger role in managing Australia’s economic recovery.
He cited three key policy measures adopted by the RBA in the wake of the crisis:
1. Reducing benchmark rates to all-time lows of 0.25 per cent;
2. Introducing a yield target on three-year government bonds of 0.25 per cent; and
3. Providing lending facilities to commercial banks to reduce their cost of funding.
“That’s a very significant contribution, but central banks work through lending, not through spending,” Lowe said.
“So it’s an indirect channel and there’s a limit to what we can do going forward. Fiscal policy will have to play a more important role in managing the economic cycle than it has in the past.
“Monetary policy won’t be able to be used in that way, there will need to be more fiscal support and that will require a change in mindset.”
Lowe also indicated his inflation expectations remained anchored, and he didn’t expect inflation to climb back toward the 2-3 per cent target band for “quite some time”.
The governor also questioned Australia’s policy stance when it came to regulating industry.
“Over the past 20 years, whenever a problem has emerged in society we’ve generally responded with additional regulation,” Lowe said.
“That’s sensible, but the process also limits our ability to seize the upside.”
Lowe said he feared that in the fallout from the coronavirus, Australia’s economy would become “even less dynamic, with more conservatism and more caution.”
“Over time I think we’ve erred too far in the direction of regulation. Something we should think about is how to reinvigorate the dynamism in our economy,” Lowe said.