Analysis: RBA Lowe’s Comments Consistent with More Fiscal, Monetary Easing

By Sophia Rodrigues

There is no doubt the Australian economy is currently tracking better than the Reserve Bank’s baseline scenario but that still means more fiscal stimulus and monetary easing is likely in the months ahead.

It would therefore be premature to discount the possibility of the RBA engaging in large-scale asset purchases or Quantitative Easing in its truest form, as the RBA itself might characterize it.

At the appearance before the Senate Select Committee on COVID-19 earlier Thursday, Governor Philip Lowe acknowledged the economy is currently tracking between the RBA’s baseline and upside scenario in the May Statement on Monetary Policy.

Lowe’s admission is in line with an Insight article published by CB-Intel on May 8 where we discussed upside risk to RBA’s baseline scenario

https://centralbankintel.com/newsdetails/insight-odds-of-rbas-upside-scenario-rise-as-morrison-signals-faster-easing

But there are lot of challenges, Lowe added.

“Recent data have been better than expected but I see a lot of challenges coming down the track,” he said.

CRITICAL POINT

What was significant about Lowe’s comments was his emphasis on uncertainties ahead and that things are “still pretty depressing” even if the economy is tracking closer to upside scenario.

The RBA’s main worry is about how things would pan out at the end of the six-month mark which Lowe termed as “critical point.” That is the period when the JobKeeper stimulus and the six-month deferral for mortgages is expected to end.

Unless the JobKeeper policy is extended or modified, there is a risk of business closures and fall in employment at that time. The risk to the economy would increase because it would coincide with households having to service mortgages just at a time when they could lose income.

MULTIPLE REFERENCES TO FISCAL POLICY

Throughout the testimony Lowe made references to fiscal policy. While this is not unusual coming from Lowe, on this occasion it was very direct and very repetitive.

Because the outlook is uncertain the economy would need support next year or so, and from both monetary and fiscal policy, Lowe said.

He did not provide any hint of any additional monetary easing; only saying the package so far is working and if the RBA had to do more, they could purchase more government bonds.

But fiscal policy is unlikely without support from monetary policy, and Lowe can provide that support via large-scale asset purchases.

That form of QE would help lower the government’s borrowing cost and bring down the Australian dollar, an outcome that would cheer the RBA.

--Contact: sophia@centralbankintel.com