The Reserve Bank of Australia will continue printing money through its quantitative easing program until September, pumping an additional $100bn into the economy, despite saying that recovery from the coronavirus crisis was stronger than expected.
Economists say the decision shows that the economy remains fragile, with unemployment remaining high and inflation stuck below the RBA’s target of between 2% and 3%.
In a speech on Monday Scott Morrison talked up the recovery, while at the same time preparing to remove support from businesses by ending the jobkeeper employment subsidy program at the end of March.
At its meeting on Tuesday, the RBA board also left official interest rates unchanged at the record low level of 0.1%.
“In Australia, the economic recovery is well under way and has been stronger than was earlier expected,” said the bank’s governor, Philip Lowe.
He said the RBA would not increase rates until wages growth, which has been less than 3% for almost seven years, was “materially higher than it is currently”.
“This will require significant gains in employment and a return to a tight labour market,” he said. “The board does not expect these conditions to be met until 2024 at the earliest.”
He said at 6.6% the unemployment rate was the highest it had been for 20 years and would probably still be 5.5% by the end of next year.
Lowe said the RBA had bought about $52bn worth of government bonds from banks and other financial institutions as part of the quantitative easing program, which began in March. The program was due to expire in April but the bank has extended it to September.
The chief economist at BIS Oxford Economics, Sarah Hunter, said although the move seemed at odds with the RBA’s sunnier economic outlook, “to achieve the RBA’s inflation target the economy needs economic activity to be significantly higher than its pre-Covid peak”.
“Australia’s economy entered the Covid downturn with capacity to spare, and notwithstanding the hit to migration the population and so productive potential of the country has increased since then.”
Brendan Rynne, the chief economist at the accounting firm KPMG, said he expected the RBA to maintain its position for the foreseeable future.
“The RBA has set out to do all it can to boost economic activity and, with business investment still fragile, and some weakness in the labour market in the new year, it will keep on its current course,” he said.
He said one risk was the soaring price of houses and other assets, which “will further exacerbate the difference between the haves and have-nots in society”.
This was mitigated by “ensuring lending standards are maintained to protect borrowers from over-extending themselves – including maintaining serviceability stringency and enforcing loan to-value ratio limits,” he said.
The government has announced it wants to ditch responsible lending laws designed to stop banks pushing unaffordable loans on to borrowers, although the change may be rejected by sceptical crossbench senators.
The banking analyst Grant Halverson said the RBA would have been worried by an “extraordinary” 6.9% fall in consumer, government and business payments in January.
“These payments show the business, import/export and government payment daily volume average fell by $8bn per day,” he said.
“Combine this with the record massive consumer savings and the decline in December retail sales and it spells trouble for banks, lenders and consumer spending.”