It’s bad but not terrible, says Reserve Bank

The Reserve Bank has dismissed the idea it is fuelling inflation by creating money to buy government bonds.

Deputy RBA governor Guy Debelle. Picture: AAP

The Reserve Bank has dismissed the idea it is fuelling inflation by creating money to buy government bonds, adding that the recession caused by the coronavirus pandemic, while still likely to be “long-lived”, will not be as bad as feared.

Deputy governor Guy Debelle said the economy’s performance had “turned out to be somewhat better” in the June quarter than expected, but suggested the government would need to extend massive support for the economy.

“If everything ceases at the end of September, yes, that would be a problem,” he said, referring to the government’s JobKeeper wage subsidy program, scheduled to cease on September 27.

The RBA had originally forecast hours worked would decline by 20 per cent, while recent figures suggest a 10 per cent trough is more likely. The unemployment rate rose to a 19-year high of 7.1 per cent in May.

“We should not lose sight of the fact that the decline in the economy and the impact on households and businesses is historically large,” Dr Debelle said.

“The scarring effects of unemployment — absolutely it’s going to have an impact going forward.”

In a long, technical speech delivered via Zoom conference call, the deputy governor also said the RBA’s policy to pin the government’s three-year borrowing rate at 0.25 per cent had been so successful that it hadn’t needed to buy more bonds since early May.

“If the three-year bond yield target is credible to the market, then the Reserve Bank does not need to purchase many bonds at all to achieve the target,” he said.

The central bank had bought more than $50bn in federal and state government bonds since launching a quantitative easing program in March, when it also cut the official cash rate to a rec­ord low of 0.25 per cent.

“While the bond purchases by the RBA increase liquidity in the system, I do not see this posing any risk of generating excessively high inflation in the foreseeable future,” Dr Debelle said.

“Indeed, the opposite seems the more likely challenge in the current economic climate, that is, that inflation will remain below the RBA’s target.”

Dr Debelle said he could not see “any issue at all” with the capacity of government to repay the bonds. Interest rates on government debt were currently below rates of economic growth, he said, which meant the economy would slowly grow out of the increase in public debt.

Dr Debelle said the RBA and the Australian Prudential Regulation Authority were mindful of increasing business insolvencies, despite liquidators so far finding themselves largely unused.

“They’re concerned they’ve not got enough work. They’re not quite there yet but given the size of the downturn, it’s going to come,” he said.

Speaking at an event organised by the Economic Society of Australia, Dr Debelle said the bond market had calmed down after a worrying period of instability in March.

The RBA board will meet next week to consider monetary policy, which has remained largely unchanged since March, when it made major changes, including providing a $90bn “term funding facility” for banks.