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RBA warns against dumping stimulus too quickly

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The deputy governor of the Reserve Bank has cautioned that the government needs to exercise care when lifting its fiscal support from under the economy, with a vaccine-backed recovery from the COVID crisis expected to be bumpy.

Guy Debelle, deputy governor for the Reserve Bank of Australia (RBA) has deferred to learnings from the 2009 global financial crisis as he spoke about the organisation’s monetary policy for 2020. 

“There is a lesson from the crisis… that is relevant to today: be careful of removing the stimulus too early,” Mr Debelle told an Australian Business Economists webinar on Tuesday.

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“A number of European countries learned this lesson to their cost after the global financial crisis.”

The government is forecast to have a deficit to the effect of 11 per cent of GDP in the 2020/21 budget, as a result of its spending. But Mr Debelle insisted the debt is “very manageable” and key to upholding the country.

“Public sector debt remains low as a share of GDP for the Australian government as well as the states and territories, even after the sizeable stimulus that is being implemented,” Mr Debelle said.

“…It is also important to ask: what is the alternative? Absent the fiscal support, the Australian economy would be much weaker with the consequent economic and social damage. This would have materially worsened the fiscal position.”

With the cost of borrowing at historically low levels for Australian governments, the debt dynamics are sustainable, Mr Debelle commented. And for now, it is important to “keep the credit flowing”. 

As previously indicated by the central bank, it is reluctant to follow what other countries have done and lower already historic low rates to negative territory. 

There is research available that argues in favour of negative rates, but for Mr Debelle, they are not “overly convincing”. He has also been told by other central banks counterparts that rates below zero have not been overly effective, with some consumers not reacting as expected.

“I do know that there’s some literature out there which says that they are effective but I find, certainly in terms of supporting the flow of credit, I don’t find the evidence all that convincing and talking about some of my counterparts, they note that,” the deputy governor said.

“And they also know the behaviour of some parts of their economy, some of the household sector, in terms of saving more than saving less because of the lower rate of return of savings. Now, from a theoretical point of view, that’s not sensible, but that what happens, or that’s happening in some of these other jurisdictions.”

Similar to Future Fund chief executive Raphael Arndt, Mr Debelle warned even with the sentiment boost gained from the news of viable vaccines, the economic recovery will be uneven. 

“It is likely to be some time before the vaccines will be widely available and distributed,” Mr Debelle said.

The Victorian government declared its budget on Tuesday, following the recent budgets from NSW and the federal government. It remains to be seen how the resulting policies take effect, the deputy governor commented. 

That said, fiscal and monetary support is expected to bolster spending and in turn, increase employment. 

“A materially lower unemployment rate is clearly desirable in itself, but will also be necessary before we will see sustainably higher wages growth and inflation,” Mr Debelle said.

On Monday, the RBA released an estimate that the government’s JobKeeper program had kept one-fifth of the individuals it covered employed – saving at least 700,000 jobs.

 

RBA warns against dumping stimulus too quickly
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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