RBA commits another $100bn to bolster ‘bumpy’ recovery

The economy will return to its pre-pandemic size by the middle of this year, six months earlier than expected.

The RBA held rates at 0.1 per cent at its first board meeting of the year.

The economy will return to its pre-pandemic size by the middle of this year, six months earlier than expected, according to new Reserve Bank forecasts.

But the RBA will embark on a $100bn monetary support plan and keep interest rates on hold until 2024 “at the earliest” to help underwrite a “bumpy and ­uneven” recovery.

Ahead of a key speech at the National Press Club on Wednesday, RBA governor Philip Lowe said the economic recovery was “well under way” and had been “stronger than was earlier ­expected”, but he cautioned it would remain “dependent on the health situation and on significant fiscal and monetary support”.

Dr Lowe’s comments, and new RBA estimates that show ­unemployment will fall more swiftly, come as Scott Morrison considers what economic support to keep in place when payments such as JobKeeper and an ­expanded JobSeeker expire in March.

The Prime Minister on Tuesday strengthened his language around the need to shift from large-scale, emergency support toward more modest and targeted measures despite attacks from Labor that it would leave struggling workers behind.

“The Australian economy is getting back on its feet,” Mr Morrison said.

“And Australians understand that. When we put these measures in place they had to be done as emergency measures, but they also know that you cannot run the Australian economy on taxpayers’ money forever.”

Reserve Bank Governor Philip Lowe says the economic recovery is “well under way’. Picture: Gary Ramage

The central bank updated its growth and labour market forecasts to show unemployment would fall to 5.5 per cent by the end of 2022, compared with the 6 per cent forecast in December.

On Tuesday, the Australian dollar dipped by US0.4c to US76.2c following the announcement that the bank would double its bond-buying program to $200bn. This signalled that, ­although the timing was a ­surprise, the decision to extend quantitative easing beyond April was not.

Dr Lowe warned that an ­important near-term issue was how households and businesses adjusted to the tapering of some COVID support measures and to what extent they would use their stronger balance sheets to support spending.

Speaking to Labor MPs on the first parliamentary sitting day of the year, Anthony Albanese said the Coalition wanted to make “cuts to JobKeeper, cuts to JobSeeker and cuts to wages”.

But Mr Morrison told parliament that continuing massive ­fiscal support indefinitely was ­unsustainable and that “Australians understand that”.

“They know you have to be ­responsible about taxpayers’ money,” the Prime Minister said.

“Our government has demonstrated its fiscal responsibility, but also the urgency of fiscal action when it is necessary, which the governor of the Reserve Bank has also commended.”

Mr Morrison has nonetheless pledged that the government will continue delivering support packages for specific sectors when JobKeeper payments cease at the end of March. Mr Morrison, who is waiting on data showing how many businesses moved off JobKeeper in January, said the payments had “protected livelihoods … and saved lives itself”.

Scott Morrison during the first Question Time in Parliament House in Canberra on Tuesday. Picture: Gary Ramage

Josh Frydenberg said jobs and confidence were surging “back to their pre-pandemic levels” after Australia last year stared into the “abyss of a double-digit fall in economic growth and tripling of the unemployment rate”.

The Treasurer said 320,000 jobs had been created over the past three months, with two million Australians and 450,000 businesses graduating off JobKeeper ­payments.

Mr Frydenberg said the scheme was always intended to be temporary, with $80bn paid out through the program supporting 3.5 million Australians.

While the RBA’s decision to keep rates steady at a record low 0.1 per cent was expected, the decision to announce an extension to the bond-buying program — due to expire at the end of April — for a further six months came earlier than economists anticipated.

The RBA expects GDP will grow by 3.5 per cent this year and next, compared with earlier estimates that national output would expand by 5 per cent in 2021 and 4 per cent over 2022.

The slower pace of growth ­reflects a shallower than anticipated coronavirus recession.

RBC Capital chief economist Su-Lin Ong said the RBA had sent a “bold and strong message” that extraordinary monetary policy support would continue.

Australian Industry Group chief executive Innes Willox said the RBA’s assessment that economic output would recover to late 2019 levels by the middle of this year was a “stunning turnaround on early expectations”.

“Its anticipation that interest rates will not rise from current very low levels for a number of years, should provide businesses and households with greater confidence to invest and spend,” Mr Willox said.

Strong growth in employment and solid retail spending had been underpinned by “Australia’s success on the health front and the very significant fiscal and monetary support”. he said. “Even so, the economy is expected to operate with considerable spare capacity for some time to come.”

The current unemployment rate of 6.6 per cent “remains ­higher than it has been for the past two decades”, Dr Lowe added.

He said interest rates were ­unlikely to move until inflation was back within the 2-3 per cent zone — an outcome that would ­require wages growth to be ­“materially higher”.

“The board does not expect these conditions to be met until 2024 at the earliest,” he said.