Insight: Expect More RBA, Fiscal Easing as Australia Looks Beyond Bridge

• Published on
• 25 May 2020, 05:23 PM

By Sophia Rodrigues

The Reserve Bank of Australia and the government have in recent months announced several measures to support the economy and while these measures have been unprecedented, they are just a bridge to recovery.

This means further easing of monetary policy and more fiscal measures are likely in the months ahead.

LOOKING BEYOND THE BRIDGE

By definition, a bridge is something that joins or connects. It is a structure that helps one to cross an obstacle.

But once crossed, it would be unrealistic to assume that the obstacle itself didn’t cause some damage on the other side.

The RBA and the government’s package of measures, along with support from financial institutions, are doing the job of the bridge.

“This response has been built around the idea that we need to build a bridge to the point when the virus is contained and the capacity of our health system has been scaled up so that it can cope,” RBA governor Philip Lowe said in a speech last week.

The bridge is being built in an uncertain environment where there is yet no clarity on how long and how strong it needs to be.

In the best-case scenario, the current measures would be enough to meet the need of a stronger and longer bridge, and it will take the economy on the other side.

But after that there will be a bigger task ahead -- taking the economy on a sustainable growth path and towards a full employment level, and ensuring inflation is sustainably in the target band.

That task would require more stimulus.

The RBA expects the stimulus to come from fiscal policy but it is unlikely more fiscal easing would come without further assistance from monetary policy.

So, expect a combination of more monetary and fiscal easing.

UNUSUAL SPEECH LAST WEEK

If there was any hint of more easing, it was in Lowe’s speech last week.

The speech was a very unusual one because it was the first time Lowe made no effort to be the source of stability and confidence that he is known for, the so-called glass half-full man.

Lowe talked about how critical it is to restore people’s confidence but he himself made no effort to boost confidence. What was missing was any reference to Australia’s strong fundamentals, something he has done several times in the past, and as recently as on April 21.

“We can be confident that our economy will bounce back and that we will see it recover. We need to remember that once the virus is satisfactorily contained, all those factors that have made Australia such a successful and prosperous country will still be there,” Lowe said in his April 21 speech.

On this occasion, instead of confidence-boosting words Lowe focused on uncertainty, and pointed to fiscal support and economic reform agenda as solutions.

“One obvious source of uncertainty is the pace at which the various restrictions are eased...Another source of uncertainty is the level of confidence that people have about their future, both in terms of their health and their own finances,” Lowe said.

He added, “Fiscal support through this difficult period has also been crucial and will continue to be over the months ahead. So too will be a reinvigorated economic reform agenda that gives the community the confidence that once the virus has passed, we can move quickly out of the economic shadow it is casting.”

Lowe’s reference to more fiscal support means he is prepared for more monetary support because fiscal easing won’t come easily unless RBA is prepared to share some burden.

--Contact: sophia@centralbankintel.com