RBA says Australian recovery underway, population slowdown a major drag

[SYDNEY] Australia's central bank on Friday nudged up its forecasts for near-term economic activity but warned that a drastic downturn in population growth meant the economy would be "noticeably smaller" than assumed pre-pandemic.

In its 89-page statement of monetary policy, the Reserve Bank of Australia (RBA) said recovery was underway as all of the country opened up from coronavirus lockdowns, but the path ahead would be rocky and uncertain.

Unemployment was set to stay high and so depress both wages and inflation, leading the central bank to cut interest rates to a record low of 0.1 per cent earlier this week.

The bank also dived into quantitative easing for the first time, pledging to buy A$100 billion in government bonds over the next six months with the aim of lowering borrowing costs.

The bank's policy-making Board emphasised it was not contemplating cutting rates any further as it judged there was little to gain from moving to negative rates.

Yet it did commit to not raising rates until inflation was back in its 2-3 per cent target band, something not expected for at least three more years.

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In the meantime, the focus would be on its asset buying program.

"If the circumstances require, the Board is prepared to do more and undertake additional purchases," the RBA said.

It is hardly alone, with the Bank of England on Thursday expanding its bond buying plans by more than expected.

Pressure is also on the Federal Reserve to ease further as a tight US election has diminished the chance of major fiscal stimulus in coming months.

Australia has at least been successful in containing the virus, leading to a less severe recession than first feared. The RBA now sees annual economic growth of -4 per cent in the December quarter, compared to a previous forecast of -6 per cent.

Unemployment was expected to peak around 8 per cent, down from its prior forecast of 10 per cent, but decline only slowly from there to around 6 per cent by the end of 2022.

However, it expected Australia's international borders would remain shut until the end of 2021, cutting off migration which had been the single largest driver of population growth.

Annual population growth was seen collapsing to just 0.2 per cent in the 2020/2021 fiscal year and 0.4 per cent in 2021/22, down from 1.6 per cent or more in previous years.

"This is the slowest rate of population growth since the First World War," the RBA noted, and a material challenge to the longer-term outlook.

"Overall, the economy is expected to be noticeably smaller at the end of the forecast period than anticipated prior to the pandemic."

REUTERS