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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Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

• The big four banks are: ANZ, CBA, NAB and Westpac
• The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
• The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
• If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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