RBA: Economy Would Require Substantial Policy Support For Considerable Period

• Published on
• 15 Dec 2020, 11:31 AM

RBA: TO KEEP SIZE OF BOND PURCHASE PROGRAM UNDER REVIEW
--MONITOR QE IMPACT ON ECON, MKT FUNCTIONING AT FUTURE MEETINGS
--PREPARED TO DO MORE IF NECESSARY
--TIMELY, WIDE VACCINE AVAILABILITY WLD REDUCE DNSIDE RISK TO MEDIUM-TERM OUTLOOK
--SUBSTANTIAL POLICY SUPPORT REQUIRED FOR CONSIDERABLE PERIOD
--SIGNIFICANT SPACE CAPACITY IN LABOR MKT A KEY POLICY CHALLENGE FOR SOME TIME
--AUD UP, USD DOWN ON IMPROVED GLOBAL GROWTH OUTLOOK
--ON TWI BASIS EXCHANGE RATE 2% BELOW PEAK IN EARLY SEPTEMBER
--REBOUND IN LABOR PARTICIPATION RATE WAS SURPRISINGLY SWIFT

By Sophia Rodrigues

The Reserve Bank of Australia expects the Australian economy to require substantial policy support for a considerable period despite upgrades to the GDP outlook for the recent two quarters, and faster than anticipated recovery in employment.

In the minutes of the December board meeting, published Tuesday, the RBA said there continued to be significant amount of spare capacity in the labor market and the economy more generally.

“The recovery was still expected to be uneven and protracted, with inflation remaining low,” the RBA said.

One surprise for the RBA was the swift rebound in the participation rate in the October labor force data.

Overall the RBA concluded that significant spare capacity in the labor market would remain a key policy challenge for some time.

Further evidence of spare capacity was low wages growth. The RBA noted wages growth in the September quarter was the slowest in the history of the series.  Going ahead, the RBA is particularly concerned that if new collective agreement were established at lower rates of growth than existing agreements, it would place further downward pressure on wages growth.

On the exchange rate, the RBA appears to placing more emphasis on the trade-weighted index which was 2% below its peak in early September.

The Australian dollar’s gain was largely a reflection of depreciation in the U.S. dollar and the opposing movements in both was in response to an improvement in the medium-term outlook for global growth, the RBA said.

At the time of the board meeting the news was some potential COVID-19 vaccines were nearing approval for emergency use in the US, UK and the European Union. The RBA said that should these vaccines prove effective in practice and be made widely available on a timely basis, this would reduce downside risks to the medium-term economic outlook.

--Contact: Sophia@centralbankintel.com