The Reserve Bank governor says Australia’s economy has passed its low point but faces a “bumpy path ahead”, with the Federal Government best placed to support the recovery.
In an annual speech to the Anika Foundation, Philip Lowe pointed to last week’s June jobs numbers as evidence that “we have now turned the corner” economically.
“In June, hours worked increased by 4 per cent and the number of employed people rose by 210,000,” he said.
“Notwithstanding this turnaround, the path ahead is expected to be bumpy and there are some major crosscurrents in the labour market at the moment.”
Dr Lowe warned one of those bumps was feedback from many businesses, particularly in construction and professional services, who said they were only able to hold on to their employees because they had an existing pipeline of work.
“As new orders have declined, this pipeline is drying up,” he observed.
“If it is not replaced soon, hours worked in these businesses will decline further, just at the same time that other parts of the economy are coming back to life.”
The Reserve Bank boss said continued government support, such as the Federal Government’s JobKeeper and JobSeeker programs, which were today extended into 2021 in a scaled-back form, would be necessary to help the economy recover.
He said the Government was exceptionally well placed to provide this continued support.
“The Australian Government is able to finance itself in the bond market, and it can do so on very favourable terms,” Dr Lowe said.
“There is strong demand for government debt and the Australian government can borrow for five years at just 0.4 per cent and for 10 years at just 0.9 per cent.
“These are the lowest borrowing costs since Federation.”
Not only are interest rates low, but Dr Lowe said Australia entered the pandemic with very low public debt relative to other nations.
“Debt across all levels of government in Australia, relative to the size of our economy, is much lower than in many other countries and it is likely to remain so,” he explained.
“So the public balance sheet is well placed to smooth out the shock to private incomes and support the economy through the pandemic.”
In that context, Dr Lowe today categorically ruled out any direct central bank financing of the Federal Government’s spending, as suggested by Modern Monetary Theory (MMT).
MMT attacks the obsession with government deficits and debt, and is gaining traction at a time when both are rising fast. Gareth Hutchens explains what MMT is, where it comes from and what its critics say.
“Monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be,” he told the webinar audience.
“The message here is that somebody always pays.
“It certainly is possible for the central bank to change when and how the spending is paid for, but it is not possible to put aside the Government’s budget constraint permanently.
“Where countries have, in the past, sought to put aside this constraint, the result has been high inflation.”
Dr Lowe again downplayed the possibility of interest rates being cut much further from their current record low of 0.25 per cent.
“There has been no change to the board’s view that negative interest rates in Australia are extraordinarily unlikely,” he told an audience of business economists, many of whom work for the banking sector.
“Our reading of the international evidence is that the main potential benefit from negative rates is downward pressure on the exchange rate.
“But negative interest rates come with costs too. They can cause stresses in the financial system that are unhelpful for the supply of credit.
“They can also encourage people to save more, rather than spend more, so they can be counter-productive from that perspective too.
“So this is not a direction we need to head in.”abc news