Reserve Bank Governor, Philip Lowe has made it very clear that he sees the current record low level of interest rates of 0.10% and other support remaining in place until 2024 at least and possibly 2025.
In his first every speech to the National Press Club in Canberra, Dr Lowe went a bit further than his statement on Tuesday afternoon after the end of the RBA’s first policy meeting for 2021.
He told his audience and TV viewers that “very significant monetary support will need to be maintained for some time to come. It is going to be some years before the goals for inflation and unemployment are achieved. So it is premature to be considering withdrawal of the monetary stimulus.”
Dr Lowe said official interest rates would not be increased until inflation was “sustainably” between 2 and 3 per cent which also required much stronger wages growth.
“It is difficult to determine exactly when this condition might be met but … we do not expect it to be before 2024 and it is possible that it will be later than this,” he said.
“[The] cash rate will be maintained at 10 basis points for as long as is necessary.
“So the message is this: interest rates are going to be low for quite a while yet,” Dr Lowe said.
This is despite the economy doing better in terms of lowering unemployment, jobs creation, retail sales, booming house building (see the building approvals story), better growth and a strong trade performance.
He said new forecasts in Friday’s first Statement on Monetary policy for the year will show the economy growing by 3.5% in both this year and next. GDP will return to its pre-pandemic level by the middle of this year which will be six to 12 months earlier than the RBA previously forecast in late 2020.
Despite the recovery, he said the National Accounts for the December quarter, when released early next month, is expected to show the economy is about 4% smaller than what it had been expected to be with Dr Lowe describing this as a “big gap”.
And he highlighted a problem not many economists had focused on – the impact of the slowdown in population growth because of the impact of closed borders on inbound education and migration generally.
When the bank’s previous forecasts were prepared in early 2020 population growth was forecast to reach 1.6% a year for 2020 and 2021, but now this is likely to fall to 0.2% restrictions on international travel due to the pandemic driven border closures.
A major problem for the economy and future growth is the slowdown in population growth.
When the bank’s previous forecasts were prepared population growth was expected to reach 1.6 per cent a year for 2020 and 2021, but now this is likely to fall to 0.2 per cent next year due to restrictions on international travel due to the coronavirus pandemic.
This he said would have an impact on economic growth – while the RBA is looking at recovery in growth,” we are not expecting the level of GDP to return to its previous trend over our forecast period,” Dr Lowe said. “This is largely because of lower population growth.”
While job vacancies, advertisements and hiring intentions are at high levels suggesting “solid employment growth” this is expected to slow when wage subsidy program JobKeeper ends in March, Dr Lowe said. The RBA expects a couple of months when unemployment rises (“blips” he described that as). But he says the bank then sees jobs growth returning.
But for inflation to be ‘sustainably’ in the bank’s target range of 2% to 3%…will require a tighter labour market and stronger wages growth than we are currently forecasting.”
“It is difficult to determine exactly when this condition might be met but, based on the outlook, we do not expect it to be before 2024, and it is possible that it will be later than this. So the message is: interest rates are going to be low for quite a while yet. The Reserve Bank is committed to provide the support the economy needs as its recovers from the pandemic.”
