Reserve Bank (RBA) Governor Phillip Lowe fronted the Senate Select Committee on COVID-19 on Thursday, fielding questions from senators on how the economy was faring in the COVID-19 era.
Dr Lowe said the Government's stimulus packages, coupled with the RBA's bond buying, meant the economy was tracking slightly better than the baseline scenario outlined in the latest statement on monetary policy.
"The shape and timing of that recovery depends not only on when restrictions are lifted, but also on the confidence that Australians have about their own health and their finances," Dr Lowe said.
"With the national health outcomes better than earlier feared, it is possible that the economic downturn will not be as severe as earlier thought.
"Much depends on how quickly confidence can be restored."
The baseline scenario predicted most social distancing restrictions to be lifted by the end of the September quarter, and activity and employment to recover in the second half of the year.
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But Dr Lowe said even as the recovery got under way, the shadow cast by the pandemic would be felt for some time.
"As a country, we will need to turn our minds as to how to move out of this shadow," he said.
"A reform agenda that makes Australia a great place for businesses to expand, invest, innovate and hire people would certainly help."
Dr Lowe gave further assurance negative rates were out of the question, as they would prevent banks from lending.
"I think negative interest rates are extraordinarily unlikely."
"I don't think negative interest rates work. The package we have so far is working . If we had to do more we could buy more government bonds."
Optimism on hours worked
The RBA has long stated its desire to see the unemployment rate at 4.5%, which it deemed as full employment.
However, Dr Lowe said the central bank has pushed the full employment tag to 5%.
"We know from previous sharp economic downturns there will be scarring in the labour market," he said.
"We want to reduce the amount of scarring. I think the estimate of full employment starts rising again to 5%."
Dr Lowe said the key metric it was using to evaluate employment, hours worked, had a much improved outlook.
Previously the RBA had predicted hours worked would fall by 20%, but had reevaluated this to 15%.
The Australian Bureau of Statistics found hours worked declined 9.2% in April.
Stimulus measures are vital for recovery
There has been speculation JobKeeper and JobSeeker could be ended sooner than their scheduled 27 September date, with Scott Morrison refusing to rule it out.
Dr Lowe said the fiscal stimulus was vital for economic recovery and ending it early would be a mistake.
"I think it's very important that we don't withdraw the fiscal stimulus too early," Dr Lowe said.
"Ending the fiscal support could be damaging, but if the economy bounces back then tailoring the fiscal support might be the right thing to do."
However, the central bank Governor added the RBA hadn't incorporated the schemes into its forecasts but said that a review of both schemes was necessary for their success.
"We didn't make assumptions about the number of people on JobKeeper or JobSeeker."
"There will be a three month review of the program and I think it was very sensible of the government to build that into the program."
The Labor Opposition, among others, have slammed the Government for their $60 billion miscalculation of how much the JobKeeper program would cost.
But Dr Lowe said the new figure was good news for the economy.
"The economy is doing a bit better than was earlier feared. People were talking about a six month hibernation. But businesses are opening up now," he said.
"It's really good news that that amount of money [for JobKeeper] doesn't have to be spent.
"Right now I don't think they do need to spend more [on JobKeeper] but the issue will be in three to four months time."
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