RBA’s Lowe upbeat about 2022

  • By Elizabeth Fry

Reinforces decision to taper bond-buying from next month 

Reserve Bank of Australia Governor Philip Lowe cannot rule out another recession if the health situation deteriorates but told a parliamentary economics committee it is unlikely at this stage. 

The Governor said on Friday that the experience both in Australia and elsewhere is that once restrictions are lifted, spending recovers strongly, especially if people have confidence about the future.  

“While the exact timing of the bounce-back is difficult to predict, it is likely to start well before the end of the year.  

“The vaccination program is ramping up and governments are providing significant targeted income support to help businesses and households get through this difficult period. This means that there is a pathway out of the current difficulties this year." 

The RBA is forecasting a return to strong economic growth in 2022 with GDP increasing by a little over 4 percent followed by around 2.5 percent growth in 2023. 

However, Lowe said the main risk to this outlook was the emergence of a vaccine-resistant virus strain. 

Lowe said another uncertainty relates to the type of adjustments society will have to make to live with the coronavirus on an ongoing basis.  

"Once vaccination rates are high enough, we will be living with a virus that is endemic rather than living through a pandemic. What this endemic phase looks like is still to be determined," he told the committee. 

On the upside, he argued, the Australian economy could again experience a run of positive surprises, as it did earlier this year. “If we are successful in containing the virus over the months ahead, it is possible there will be stronger upswings in both investment and consumption than envisaged in our central scenario.” 

Tapering bond purchases 

Last Tuesday, Lowe surprised economists by sticking with an earlier decision to start tapering its weekly bond-buying program to $4 billion - from the current $5 billion - from September. 

In considering the case for winding back the program next month he said the critical issue here is the outlook for the economy.  

"As I discussed earlier, we are expecting a return to strong growth next year." 

The Governor said any additional bond purchases would have their maximum effect at that time and only a very small effect right now when the extra support is needed most.  

He also told the committee that fiscal policy is the more appropriate instrument for providing support in response to a temporary and localised hit to income. 

As for the cash rate, Lowe reiterated that the central bank will not be raising the cash rate until inflation is sustainably in the two to three percent range. “It will not be enough for inflation to just sneak across the two percent line for a quarter or two. “We want to see inflation well within the target band and be confident that it will stay there.” 

The cash rate is not expected to be lifted before 2024.