Economy primed to go off like a rocket, says Reserve Bank

RBA governor Philip Lowe has maintained that rates will remain at near zero for at least another three years, despite unveiling a sharply upgraded economic outlook.

Reserve Bank Governor Philip Lowe has stuck with his forecast that rates won’t be rising until 2024, despite the rapid labour market recovery. Picture: Gary Ramage

The Reserve Bank has forecast the national economy will roar out of the COVID-19 recession to record the fastest calendar year of growth in more than two decades in 2021, and expects the country to reach full employment by the end of next year.

RBA governor Philip Lowe unveiled the sharply improved economic outlook in a statement accompanying the May board meeting, in which he also maintained that rates would remain at 0.1 per cent “until 2024 at the earliest”, despite the upgrades.

“The economic recovery in Australia has been stronger than expected and is forecast to continue,” Dr Lowe said.

The bank’s economists now expect real GDP to expand by 4.75 per cent over the year to ­December 2021, versus a previous estimate of 3.5 per cent. Forecast growth in 2022 was steady at 3.5 per cent, Dr Lowe said.

The last time the economy grew that fast was in 1998, by 5.2 per cent, according to the Australian Bureau of Statistics.

A faster expansion would drive unemployment down to 5 per cent by the end of this year, from 5.6 per cent in March, and to 4.5 per cent by December 2022 — both about one percentage point lower than projected by the central bank in February.

The sharp upgrades, which will be detailed in full in the RBA’s quarterly Statement on Monetary Policy on Friday, were widely expected as the labour market recovery has tracked well ahead of the central bank’s forecasts in February.

Unemployment dropped to 5.6 per cent in March, almost a full percentage point below the Reserve Bank’s prediction it would still be around 6.5 per cent in the June quarter.

Ahead of what is expected to be another big-spending budget next week, Josh Frydenberg last week outlined a new fiscal strategy which committed the Morrison government to driving unemployment below 5 per cent in a corresponding bid to spark long absent wage pressure.

The Treasurer has quoted Treasury research suggesting unemployment needed to fall below 4.75 per cent before workers could expect broad-based pay rises.

But Dr Lowe on Tuesday flagged that the labour market recovery would not spark much in the way of additional inflation, with the RBA upgrading its annual inflation forecast by only a quarter of a percentage point to 2 per cent by the middle of 2023.

A much-improved economic outlook combined with minimal changes to underlying consumer price growth expectations allowed the central bank to maintain its highly accommodative monetary policy stance.

“The board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target,” Dr Lowe said.

“It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.

“For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest.”

Citi chief economist Josh Williamson said the mix of strong expected labour market recovery but muted inflation suggested the RBA believed unemployment would need to drop below 4 per cent before triggering inflationary pressures.

But ANZ head of Australian economics David Plank said he detected some softening in the RBA’s belief that rates would need to stay at virtually zero for at least the next three years.

Mr Plank said there was a “subtle change” to the guidance around rates versus the April statement, with the board now saying it was “unlikely” the conditions to raise rates would be reached until 2024 at the earliest, versus a previous, stronger assertion that the board did not “expect” these conditions to be met in the same time frame.

The RBA governor did not flag any concerns around the housing property boom, despite data released by the Australian Bureau of Statistics on Tuesday revealing new investor lending surged by 13 per cent in March — the fastest growth in nearly 18 years.

There were signs, however, that the strength of the recovery meant the central bank would begin to wind back additional monetary policy measures put in place through the pandemic.

Dr Lowe said the RBA would not be extending its $200bn cheap funding facility for banks beyond June 30.