RBA: Unemployment to rise, helicopter money ruled out

^{Photo by Nathan Hurst on Unsplash}

Australia's central bank Governor said unemployment is set to rise further as the scars from COVID-19 deepen.

Addressing the Anika Foundation on Tuesday, Reserve Bank (RBA) Governor Phillip Lowe said even despite signs of recovery, the path forward for the labour market was uncertain. 

"This is because many of the people who lost their jobs over recent times have been classified as not in the labour force and so are not counted as unemployed," Dr Lowe said.

"As the labour market continues to improve, we expect many of these people will start looking for jobs, and thus be classified as rejoining the labour force.

"This will push up the measured unemployment rate at the same time that the share of the working-age population with a job is also rising." 

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Dr Lowe said until scientific breakthroughs were made or we become better at managing the virus, incomes would be temporarily lower.

He also said although the figures in April and May - which showed employment fall by around 870,000 people - were staggering, Australia had now turned the corner. 

"In June, hours worked increased by 4% and the number of employed people rose by 210,000," he said.

"Notwithstanding this turnaround, the path ahead is expected to be bumpy and there are some major cross-currents in the labour market at the moment."

Prime Minister Scott Morrison today announced a tapered extension to JobKeeper and JobSeeker, and Dr Lowe said both schemes were vital for recovery. 

"By helping the economy today, these measures also support the all-important confidence that I spoke about earlier," he said.

"So they assist with a return to more normal patterns of spending and consumption, without the need for ongoing fiscal stimulus." 

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"There's no free lunch" 

Dr Lowe also used his address to rule out the possibility of Modern Monetary Theory (MMT), whereby the RBA deposits money in every bank account in Australia, also known as helicopter money. 

The RBA has the ability to create money and avoid financial constraints, offering a free lunch of sorts. 

"So the argument goes, if the government needs money to stimulate the economy, the central bank should simply create it in the public interest," Dr Lowe said.

"The reality, though, is there is no free lunch. The tab always has to be paid and it is paid out of taxes and government revenues in one form or another."

Dr Lowe said helicopter money could push inflation up too drastically, so the central bank would have to hike the cash rate, meaning the general population would end up funding the system. 

"So I want to make it very clear that monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be," he said. 

"The Australian Government is able to finance itself in the bond market, and it can do so on very favourable terms."

Dr Lowe reaffirmed the Board had no appetite for negative interest rates in Australia, as it would encourage people to save more, rather than spend more, which is not the direction we needed to head in. 

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