RBA Governor, Guy Debelle made it clear interest rates will remain at current ultra-low levels for the next three years and possibly more.
In an online speech yesterday he said further rate cuts could happen as the economy struggles to break free of the impact of the pandemic and sluggish demand.
He said it would be a grinding economic recovery and so far the rebound from the depths of the recession in April and May has been “gradual and slow” rather than the economic snapback initially expected.
Dr. Debelle said despite last week’s better-than-expected jobs report (with the jobless rate falling to 6.8% unexpectedly and not rising, from July’s 7.5%), which showed there were still substantial headwinds facing the economy.
He pointed out that before the pandemic, unemployment was around 5% yet this was not low enough to generate wages growth strong enough to boost inflation.
Dr. Debelle said the recovery was also be held back by a large shortfall in demand that usually occurred during a recession.
“Overall the recovery has not been a rapid bounce but a slow grind,” he said. “Until households and businesses are confident about future demand and income, they will be reluctant to spend and invest.”
Dr. Debelle said the strongest recovery had been in Western Australia, which is experiencing retail consumption at pre-COVID-19 levels and some businesses are reporting a shortage of labour.
He said the central bank expects the economic demise of Victoria has subtracted 2 percentage points from the September quarter’s GDP (which will be reported in the first week of December).
The deputy governor’s choppy outlook also coincides with weekly payroll figures that show for the week ending September 5, payroll jobs were down 4.5% from March 14 (which is the starting point for comparisons on wages, jobs, and retail sales performance during the pandemic and in and after the lockdowns).
But the release also showed a second monthly rise in wages – up 0.9% from the previous report (when they rose 0.2%). Since March 14 (when Australia had 100 COVID-19 cases), wages have fallen 4.3% which was a better outcome than the 5.2% fall in July-August.
Dr. Debelle also said the bank was ready to buy more government debt and is looking at buying bonds that will mature beyond 2023 in a bid to drive down longer-term borrowing costs and keep them low.
He said that apart from pushing rates lower, such a move would also encourage investors to buy assets that may be based overseas which in turn would help bring down the value of the Australian dollar.
Dr. Debelle said direct intervention in the foreign currency market was also an option given it could boost the economy.
“A lower exchange rate would definitely be beneficial for the Australian economy, so we are continuing to watch developments in the foreign exchange market carefully,” he said.
Comments that direct from Reserve Bank officials are very rare and had a brief impact on the value of the dollar, knocking down to around 71.92 US cents from 72.35. it later regained the 72.20 level.
So on the face of it, nothing happened, but it did knock the forex market off balance, which was the aim of the very public commentary.