In a letter to distributed to media in September, the former PM and treasurer accused the Reserve Bank of being too conservative and failing to do what was necessary to combat the coronavirus economic crisis.
Responding to the criticisms, Dr Lowe commented while he respected the views of Mr Keating, he had to disagree.
“I feel like this year we have been very courageous and we’ve done things that if someone said we would do them at the beginning of the year I would have laughed and I suspect the federal government and the state governments are in a similar position,” he told the House of Representatives standing committee on economics on Wednesday.
“They’ve had to do things that they did not think were possible or desirable, and the same is true for my board. I think it’s a credit to the Australian political system and our institutions that we have been able to respond flexibly, we’ve been sensible, we’ve learned from the lessons from overseas and we’ve responded pragmatically and in the public interest.”
‘Recovery will be uneven and bumpy’
Australia has landed in a better position than previously forecast, but the road to a full recovery will be long and unsteady, Dr Lowe warned.
As outlined by the governor, the unemployment rate is now likely to peak between 7-8 per cent, rather than its previously expected 10 per cent.
Australia exited its recession during the September quarter, with economic activity rising by 3.3 per cent.
The Reserve Bank is anticipating the rise to continue into the next three months. Its central scenario now sees the economy growing by 5 per cent next year, and then 4 per cent over 2022.
But as Dr Lowe cautioned, the lifted figures “cannot hide the reality that the recovery will be uneven and bumpy and that it will be drawn out”.
“Even with the overall economy now growing solidly, it will not be until the end of 2021 that we again reach the level of output recorded at the end of 2019,” he said.
“The effects of this loss of output and income are all too obvious in the labour market. The unemployment rate currently stands at 7 per cent and we are expecting it to be still above 6 per cent in two years’ time. Underemployment is higher still, with many people working on reduced hours.”
An extended period of high unemployment remains the largest stability risk for Australia, Dr Lowe said, with consumers unable to spend or pay back their debts.
Another consequence of higher unemployment is that wage and price pressures are likely to remain subdued. The RBA is expecting annual wages growth of less than 2 per cent in each of the next two years.
The central bank has already signalled that it will require inflation to reach its target of 2-3 per cent before it raises its historic low cash rate of 0.1 per cent.
Dr Lowe has forecast that the change will come about during the next three years.
“I’m hopeful that gradually over that period of time, the labour market will tighten sufficiently, the unemployment rate will come down and wage increases will start lifting. And then inflation will be back in the 2-3 per cent range and then we can lift interest rates,” he said.
“I’m reasonably confident that we’re not going to be back in a situation where the unemployment rate is 4 point something for quite a few years, but beyond that I’m sufficiently hopeful. I think it’s plausible that we can get there, it’s going to take time.”
On Tuesday, the central bank chose to hold the cash rate with its hope being that lower borrowing costs will free up cash flow for both households and businesses.
The 0.1 per cent rate is also supposed to support asset prices, boost balance sheets, consumption and investment, and lower the value of the Australian dollar.
However, Australia is not past the health crisis yet and the possibility of another outbreak remains, with Europe serving as a “salutary reminder” that the virus could return with a vengeance. The European economy had begun to bounce back a mere three months ago.
But Australia is in a strong position and if the vaccine is distributed to all of its people sooner than the end of 2021, the country’s economic indicators may improve faster than expected.
“Recent medical breakthroughs give us some hope that things will work out better than this,” Dr Lowe said, referring to the central bank’s base scenario.
“The result would be an upside surprise to growth and jobs, especially given the significant policy stimulus that is already in place, the generally strong balance and the substantial government incentives for businesses to employ people and invest.”
