Economy already back at pre-COVID levels, RBA says

The Reserve Bank’s latest minutes reveal the central bank remains committed to years of rates at virtually zero.

The RBA minutes suggest the central bank now believes the economy will be back at its pre-COVID size roughly six months earlier than anticipated. Picture: NCA NewsWire/Joel Carrett

The Reserve Bank believes the national economy likely recovered all its COVID losses by the end of the March, minutes from the most recent meeting have revealed.

The lifting of restrictions and tens of billions in emergency government support drove the fastest six months of growth on record over the back half of last year, and the RBA members noted that “the strong recovery in the Australian economy had continued into 2021”.

“Overall, preliminary data suggested that GDP in the March quarter was likely to have recovered further to around its pre-pandemic level, earlier than previously expected,” the minutes from the April 6 meeting read.

The RBA will release its new set of economic forecasts on May 7, four days before the federal budget.

Economic activity may have returned to pre-pandemic levels much earlier than anticipated, but monetary policymakers remained committed to keeping rates pinned to 0.1 per cent until 2024 “at the earliest”.

“Despite these generally positive developments, wage and price pressures had remained subdued and were expected to remain so for several years.”

The unemployment rate – which was at 5.8 per cent when the board met and has since fallen to 5.6 per cent – was “still too high”.

The RBA board said that wages growth would need to be “materially higher than it is currently” to drive inflation sustainably within the 2-3 per cent inflation target, and that “this would require significant gains in employment and a return to a tight labour market”.

Members again expressed optimism that the strength in the labour market suggested that “at least some of the job losses that were likely to follow the end of the JobKeeper program would be offset by new hiring”.

“While the overall recovery in the labour market was expected to pause in the period ahead, this was expected to be only temporary.”

RBA members noted that “housing prices had increased significantly in recent months”, and that “low interest rates had been one of the factors contributing to the increase in demand for housing, alongside other policies such as government grants”.

“Given the environment of rising housing prices and low interest rates, the bank would be monitoring trends in housing borrowing and the maintenance of lending standards carefully.”

However: “there was no notable evidence of a deterioration in housing lending standards”.

The RBA board members further noted that the rapid decline in the unemployment rate following its initial surge during the recession had outpaced previous recessions in the 1980s and 1990s, and that “this was likely to limit the longer term scarring effects that had hampered the recovery in labour market conditions following those downturns”.