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‘Gradual and uneven’: Australia is not going to recover from the recession quickly, RBA says

Dr Debelle said the bank was ready to buy more government debt and was looking at buying bonds that would mature beyond 2023 in a bid to drive down longer-term borrowing costs.

Apart from taking rates down, such a move would also encourage investors to buy assets that may be based overseas, which in turn would help bring down the value of the Australian dollar.

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Dr Debelle said direct intervention in the foreign currency market was also an option given it could boost the economy.

“A lower exchange rate would definitely be beneficial for the Australian economy, so we are continuing to watch developments in the foreign exchange market carefully,” he said.

Dr Debelle said despite last week’s better than expected jobs report, which showed unemployment falling to 6.8 per cent in August, there were still substantial headwinds facing the economy.

He noted that before the pandemic, unemployment was around 5 per cent yet this was not low enough to generate strong enough wages growth to lift inflation.

Dr Debelle said the RBA believed the economy was not going to recover from the coronavirus recession quickly.

“We are now in a gradual and uneven recovery,” he said.

“As the outlook for the Australian economy unfolds, the board will continue to assess the merits of the range of monetary options to best support the economic recovery.”

The bank’s charter requires it to deliver full employment and keep inflation within a band of 2 to 3 per cent.

Dr Debelle said achieving those goals was going to be difficult, suggesting the cash rate won’t be moved upwards for some time.

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“Under the central [forecast] scenario, it would be more than three years before sufficient progress was being made towards full employment to be confident that inflation will be sustainably within the target band. In this scenario, it is highly unlikely that the cash rate will be raised over that time horizon,” he said.

Federal Treasurer Josh Frydenberg will unveil the Morrison government’s budget on October 6, with the deficit expected to soar beyond $200 billion. State budgets will be rolled out in the weeks after the federal budget, with almost all of those expected to show large deficits.

Dr Debelle said all levels of government could take on more debt to boost the economy, saying total levels were relatively small while low interest rates meant debt servicing costs were modest.

“They all have strong balance sheets, with debt stocks that are low relative to other jurisdictions, even taking account of the current sizeable fiscal stimulus. The increase in debt is definitely manageable,” he said.

“Moreover, there is not, in my judgement, a trade-off between debt and supporting the
Australian economy in the current circumstance. Absent the fiscal stimulus, the economy would be significantly weaker and debt levels even higher.”

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