RBA’s Philip Lowe says rates won’t rise ‘for some years’ but JobKeeper may need to be extended

By business reporter Gareth Hutchens

RBA governor Philip Lowe says it is good there will be a halfway review of JobKeeper in June.(ABC News: John Gunn)

Reserve Bank governor Phil Lowe says the JobKeeper program may need to be extended if the workforce needs it.

Key points:

  • “It’s too early to say … what the economy is going to be like, in four months’ time,” says RBA governor Philip Lowe
  • Mr Lowe says late September will be a “critical point” when Government support is winding back at the same time as loan deferrals
  • The RBA boss says JobKeeper may need to be extended or tapered for certain industries that may not have recovered by September

He warned Australia’s economy would hit a “critical point” in September when a raft of stimulus measures stops, and it was “very important” not to withdraw fiscal stimulus too early.

“The key observation is that the world is very uncertain, and I think it’s too early to say what it’s going to be, what the economy is going to be like, in four months’ time,” Dr Lowe said on Thursday.

“But if we have not come out of the current trough in economic activity, there will be, and there should be, a debate about how the JobKeeper program transitions into something else, whether it’s extended for specific industries, or somehow tapered.”

Dr Lowe was appearing before a federal parliamentary committee via video link.

He said the economy may be in a better condition than originally feared, and the RBA had revised down its estimate for working hours lost in May from 20 per cent to 15 per cent.

However, he said even though some jobs in retail and hospitality were coming back as parts of the economy slowly reopen, jobs in industries like construction and professional services are starting to fall away.

He said he was glad the six-month JobKeeper program will be reviewed at the three-month mark.

“It’s clearly going to be a critical point when that scheme comes to an end and also when the deferral for six months of mortgage payments and other payments that the banks are offering … so that’s a critical point for the economy,” Dr Lowe said.

“I note the JobKeeper program, it’s six months, but a three-month review was built into that program and I think that was very sensible of the government to do that.

“It will be important to review the parameters of that scheme. It may be in six months’ time we bounce back well and the economy is doing reasonably well, and these schemes, which were temporary in nature, can be withdrawn without problems.

“But if the economy is not recovered reasonably well by then, as part of that review we should be looking at, perhaps, the extension of that scheme or the modification in some way.

“But I think at this point I think it’s too hard to say because the outlook remains very uncertain, but it’s going to be a very critical point in the economy.”

Interest rates unlikely to rise ‘for some years’

Dr Lowe said the RBA’s support package for the financial system, released in March, seemed to be performing well.

He also emphasised that interest rates would likely remain at 0.25 per cent for years — until the unemployment rate fell back to around 4.5 per cent (what the RBA considers to be the rate of “full employment”).

“We’re not going to be raising interest rates until full employment is in, and we’re sustainably within the 2-3 per cent target range [for inflation],” he said.

“I think it’s reasonable to expect that that will not be for some years.”

However, he also warned that if Australia did not see a recovery “fairly soon” the risk of permanent damage to the labour market would rise.

If that occurred, the level at which the economy is assumed to be at “full employment” could creep back up to 5 per cent.

“We know from previous sharp economic downturns that there is scarring in the labour market,” he said.

“People fall out of jobs and then have trouble getting back in, and then we have more long-term unemployment.

“If we don’t get a decent recovery fairly soon we’ll see more scarring, which will mean the estimate of full employment starts to rise.”

But he said the labour market was in a severe state of flux at the moment and the unemployment rate was not the best indicator of its health.

That was because thousands of people were currently working zero hours but were still considered employed, thanks to the JobKeeper program.

So a better indicator of the health of the labour force was the number of hours worked by the workforce.

On Thursday afternoon, shadow treasurer Jim Chalmers said Dr Lowe’s comments highlighted the dangers of the Government’s “snap back” strategy and a rapid withdrawal of fiscal support.

“A sudden withdrawal of support for the economy in the last week of September makes no sense at all,” Mr Chalmers said.

“The Morrison Government’s lack of a plan for the months and years ahead means the downturn will be deeper than necessary, the unemployment queues longer and the recovery more difficult.”

On Thursday, new figures showed 72 per cent of businesses have now experienced a decrease in revenue as a result of COVID-19, and roughly the same figure have accessed support measures.

Separate ABS data showed private investment was broadly flat in the first three months of the year, but firms’ expectations of future capital expenditure point to a huge drop in investment over the coming months.

Source: https://www.abc.net.au/news/2020-05-28/rba-governor-philip-lowe-says-downturn-may-not-be-as-bad-as-fea/12295954