The worsening situation in Victoria was obvious to see in the post-meeting statement from Reserve Bank governor, Phil Lowe which revealed a higher estimate of unemployment than before from the central bank and concerns about the wider impact of events down south.
The bank now sees unemployment around 10% at the end of the year compared with its 9.5% estimate in its May Statement Of Monetary Policy. The third Statement of Monetary Policy will be released on Friday.
The new estimate is also much higher than the 9.25% estimate in the Federal Government’s economic update on July 23. The RBA said the jobless rate will still be around current levels just above 7% in a couple of years’ time.
The RBA again held the cash rate at 0.25% (which will last for another three years at least on current indications) and expressed concerns about the economic fallout from stage four lockdown of Melbourne.
The bank’s decision was expected and had little impact on markets. The ASX 200 continued surging and ended the day up 1.88% as investors took heart from the buoyant news about tech stocks from the US and the strength in iron ore, gold, and copper prices overnight Monday.
While Dr. Lowe said while the current downturn was not as severe as the bank originally feared, he explained it will still going to be “uneven and bumpy”, with the coronavirus outbreak in Victoria having a major impact.
He said the bank’s baseline scenario was that the Australian economy contracted by 6% this year before growing by 5% in 2021.
“In this scenario, the unemployment rate rises to around 10 percent later in 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs,” he said.
“Over the following couple of years, the unemployment rate is expected to decline gradually to around 7 percent.”
Dr. Lowe said the economy would enjoy a stronger recovery if progress was made controlling the coronavirus “in the near future”. But failure to do so would see the recovery in the general economy and the jobs market delayed.
The governor said the federal government’s decision to extend the JobKeeper wage subsidy scheme and JobSeeker unemployment payment was a “welcome development” that would support the economy.
But he was again candid in saying that “It is likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market.”
And after consumer inflation fell to minus 0.3% in the June quarter, Dr. Lowe said the bank expects it to be positive in the current three months (because petrol prices have risen and free childcare has ended).
But inflation will not be a concern for years to come as Dr. Lowe explained “beyond that, given the ongoing spare capacity in the economy, inflation is expected to average between 1 and 1½ percent over the next couple of years.”
The RBA bank will today buy government bonds to put a lid on the three year bond rate which is trying to stay above the 0.25% level. It drifted up to 0.35% yesterday which is the highest since March 18, the day before the RBA revealed its multi-billion dollar support package and set the cash rate at a record low of 0.25% and targeted the 3 year yield at 0.25%.
