Speech
Delta, the Economy and Monetary Policy
[*]
Philip Lowe
Governor
Address to the Anika Foundation
Online - 14 September 2021
Thank you for joining us today to support the Anika Foundation. This afternoon, I would like to talk
about the implications of the pandemic for the economy and for monetary policy. But before I do
that, I want to acknowledge the impact of the pandemic on young people.
The past 18 months have been very difficult for young Australians. Their support networks have
been disrupted, leaving many young people feeling isolated and anxious about the future. Many have
also missed out on events that would normally frame their lives, such as celebrating achievements
with their peers. Their education has also been disrupted and, for many, it has been harder to get
that valuable support that a one-on-one connection with a teacher can provide.
So, our young people are paying a heavy price. This is evident in the increasing incidence of mental
health issues and the sharp rise in calls to support services. It is important that we remember this
high price when we conduct a full accounting of the costs of the pandemic and the containment
measures.
It is in this context that I want to thank you again for your support of the Anika Foundation. The
Foundation is doing important work in supporting the welfare and mental health of young people.
Thank you for being part of that work.
I would now like to turn to the economy and then monetary policy.
The economic outlook
On the economy, our central message is that the Delta outbreak has delayed - but not derailed - the
recovery of the Australian economy. The outbreak is a significant setback for the economy and it has
introduced an additional element of uncertainty about the future. But there is a clear path out of the
current difficulties and it is likely that we will return to a stronger economy next year.
Prior to the Delta outbreak, the Australian economy had considerable positive momentum. Domestic
final demand increased by 1.7 per cent in the June quarter to be more than 3 per cent above its
prepandemic level. GDP was 0.7 per cent higher in the June quarter and nearly 10 per cent higher over
the year (Graph 1).
Graph 1
GDP Growth
% %
8 8
Year-ended
4 4
0 0
Quarterly
-4 -4
-8 -8
2005 2009 2013 2017 2021
Source: ABS
It was in the labour market, though, where the positive momentum was most evident. In June, the
employment-to-population ratio reached a record high of 63 per cent and the unemployment rate fell
to 4.9 per cent, the lowest it had been in more than a decade (Graph 2). The number of job
vacancies had also reached a record high in May and there were increasing reports of labour
shortages across the country. So things were looking pretty positive and, at the Reserve Bank, we
were contemplating a further upward revision to our economic forecasts.
Employment-to-population Ratio
Seasonally adjusted, monthly
% %
62 62
60 60
58 58
2005 2009 2013 2017 2021
Source: ABS
But then Delta hit.
The result is that the economy will now contract significantly in the September quarter. Domestic
demand will contract sharply in the quarter, although stronger exports are expected to support the
GDP figures. Our rough rule of thumb is that household consumption is around 15 per cent lower
during a lockdown than would otherwise be the case. In addition, there have been disruptions to the
construction sector and some investment plans have been delayed. The exact magnitude of the
economic contraction in the September quarter remains to be determined but it is likely to be at least
2 per cent, and possibly significantly larger than this.
This is a major setback, but it is likely to be only temporary. We expect the economy to be growing
again in the December quarter, with the recovery continuing into 2022.
The key drivers here are the increasing rate of vaccination and the easing of restrictions on economic
activity. Australia has made significant progress on the vaccination front over the past month and
further progress is expected over the weeks ahead. In the past couple of weeks, around 11⁄4 per cent
of the population has been vaccinated each day, which is at the higher end of international
experience. As a result, more than two-thirds of the eligible population has now had a single
vaccination and more than 40 per cent are double vaccinated (Graph 3).
COVID-19 Vaccinations*
Share of eligible population
% %
Cumulative Daily
60 1.5
40 1.0
First dose
20 0.5
Second
dose
0 0.0
F M A M J J A S F M A M J J A S
2021 2021
*
Seven-day moving average
Sources: covid19data.com.au; Department of Health; RBA
Governments have indicated that, as these figures continue to increase, restrictions on activity will
be eased. When this happens, we can be confident that economic activity will begin to bounce back.
While it is hard to be precise about the pace and timing of this bounce-back, in the RBA's central
scenario, economic activity is expected to be back on its pre-Delta track by the second half of next
year.
One of the uncertainties here is the possibility of further significant restrictions on activity. These
could come in response to new outbreaks of Delta, the emergence of a new strain of COVID-19 or a
decline in the potency of the current vaccines. These possibilities represent the main downside risks
to the economy.
Another source of uncertainty is how Australians will respond to the easing of restrictions, given that
the easing is likely to take place with COVID-19 still circulating in the community. This is quite
different from our earlier experience, when the number of cases was close to zero, and there was a
very quick bounce-back. Whether the same will be the case this time remains to be seen. Much will
depend upon our attitude to risk and how our society deals with the ongoing rate of infection.
The experience overseas, though, provides an encouraging reference point. This experience suggests
that having COVID-19 circulating in the community does not prevent a quick bounce back in
spending, provided the population is highly vaccinated. Most people are keen to do the things they
used to and they will spend if they have the opportunity and the income. My expectation is that the
same will be true here, although we still can't be sure exactly what living with COVID-19 will look like
in Australia.
Another factor underpinning the view that the economy will bounce back is the substantial income
support being provided by the Australian Government and by the states and territories. While this
support is different to that provided earlier, for many individuals the value of that support is similar
to that provided earlier. So with consumption restricted by the lockdown, it is likely that the
aggregate household saving rate will increase again in the September quarter (Graph 4). While the
increase won't be as large as that of last year, it will mean that many people have more money in
the bank than they did pre-Delta.
Graph 4
Household Net Saving Rate*
Quarterly
% %
20 20
15 15
10 10
5 5
0 0
-5 -5
2005 2009 2013 2017 2021
*
Estimate for the September quarter 2021
Sources: ABS; RBA
It is also relevant that broader measures of household wealth have increased recently (Graph 5).
Housing prices are 19 per cent higher than they were before the pandemic and Australian equity
prices are around 10 per cent higher. This lift in the net wealth of the household sector is one of the
things that suggest that once the restrictions are eased, households will be well placed to start
spending again.
Graph 5
Real Household Net Wealth*
Year-ended growth with contributions
% %
Financial assets
20 20
Consumer durables
10 10
0 0
Dwellings
Liabilities
-10 -10
Total
-20 -20
2001 2005 2009 2013 2017 2021
*
Includes estimates for June and September quarters 2021
Sources: ABS; RBA
For businesses, it is a mixed picture.
Many of the businesses we talk to are expecting an easing of restrictions later this year. They also
remember that the labour market was tightening just a few months ago and are alive to the
possibility that this could be again the case next year. This possibility is creating a strong incentive to
keep in close contact with employees; it doesn't make much sense to let workers go, only to have
trouble hiring when restrictions are eased. Many large firms also have balance sheets that are in
good shape and they have expansion plans based on the expected easing of restrictions. Business
investment was on an upswing pre-Delta, and it is reasonable to expect that we will return to this as
restrictions are eased, demand picks up again and uncertainty starts to recede.
At the same time, many small and medium-sized businesses are facing very difficult conditions. Many
are in 'wait, survive and see' mode, having experienced a large drop in revenue. Government
assistance is helping, but the longer they have to wait before reopening, the more difficult things will
become and the greater the potential damage to this important part of the economy. For some
businesses, there is a limit to how long they can wait. So the sooner we can open safely the better.
I would like to turn to the labour market, where the numbers are going to be difficult to interpret
over coming months. Hours worked, rather than headcount, are likely to be the better guide,
because the lockdowns have meant that many people are working reduced or zero hours.
The data for the unemployment rate will be especially difficult to interpret. When people are stood
down for more than 4 weeks without being paid by their employer, they are counted as either
unemployed (if they are actively searching, and available for, other work) or not in the labour force.
This is the case even when they still have an attachment to their employer and can return to their
jobs when the lockdowns end. This is different from the JobKeeper period, when government
support was paid via firms' payrolls and many employees on zero hours for extended periods were
classified as employed.
Nationwide, hours worked fell by 0.2 per cent in July, with a large decline in New South Wales offset
by increases in other states, including Victoria, where lockdowns were briefly lifted (Graph 6). At the
same time, overall employment was broadly steady. Looking ahead, total hours worked are expected
to decline by 3-4 per cent in the September quarter. There is uncertainty about the unemployment
rate for the reasons I just spoke about, but it would not be surprising to see readings in the high
fives for a short period of time.
Graph 6
Hours Worked
January 2020 = 100, monthly
index index
Rest of Australia
100 100
95 95
New South Wales
90 90
Victoria
85 85
J F M A M J J A S O N D J F M A M J J
2020 2021
Sources: ABS; RBA
It is a positive sign that forward-looking indicators of labour demand have held up well. The number
of job advertisements fell only a little in July and August, especially in New South Wales, and are still
at high levels. The decline so far has been modest compared with the decline of around 60 per cent
during the 2020 lockdown (Graph 7).
Per cent of labour force
% %
National Skills Commission
1.5 1.5
1.0 1.0
ANZ
0.5 0.5
0.0 0.0
2011 2013 2015 2017 2019 2021
Sources: ABS; ANZ; National Skills Commission; RBA
The experience differs considerably across industries. Hospitality, for example, has seen a similar
decline in job advertisements to last year, although from a higher level (Graph 8). Meanwhile, the
hiring markets for engineers, health workers and IT professionals have not been particularly
affected. In the RBA's business liaison program we hear reports that firms are thinking twice before
laying off staff. They recall the strong labour demand before the lockdowns and many have an
expectation that activity will recover strongly when lockdowns end. But as I said earlier, this depends
upon the easing of restrictions.
Job Advertisements by Occupation*
December 2019 = 100
index index
Hospitality &
food services
200 200
150 150
Construction
100 100
Professionals
Healthcare
& administrative**
50 50
Other occupations
0 0
M J S D M J S D M J S
2019 2020 2021
*
Occupation groupings using two-digit ANZSCO level
**
Includes managers, professional, clerical and administrative workers;
excludes health and medical professionals
Sources: National Skills Commission; RBA
Monetary policy
I would now like to turn to monetary policy, where I will focus my remarks on our bond purchase
program and the outlook for the cash rate.
First, though, I want to emphasise that the RBA's package of monetary policy measures is providing
ongoing and important support to the Australian economy as it deals with the Delta outbreak. This
package includes:
a record low cash rate
a target of 10 basis points for the April 2024 Australian Government bond
a bond purchase program under which we have already purchased $200 billion of
government bonds, with more to come; and
the low-cost term funding facility for Australia's banks, under which $188 billion has been
provided for 3 years.
This monetary policy package is working by: keeping funding costs and lending rates low across the
economy; ensuring that the financial system is very liquid; supporting household and business
balance sheets; and contributing to an exchange rate that is lower than it would be otherwise. It is
through these transmission mechanisms that our policies are supporting, and will continue to
support, the recovery of the Australian economy over the months ahead.
At the Reserve Bank Board meeting last week, we considered how the bond purchase program
should evolve in response to the Delta outbreak and the change to the economic outlook. The
conclusion was that we will purchase $4 billion of bonds each week, as previously announced, but
that we will extend the period over which we do this until at least mid February next year.
This conclusion reflected a number of considerations.
The first and foremost is the delay in the economic recovery and the associated increase in
uncertainty about the future. Given that the recovery has been delayed, we considered it appropriate
that we delay any consideration of a further taper in our bond purchases until next year. By February
we will know more about how the economy is responding to the easing of restrictions than we will
know in November. We also took account of the fact that the delayed recovery means that it will
take longer to achieve our inflation goals. Continuing with the bond purchases at the announced rate
for a longer period will also provide some additional insurance against downside scenarios.
A second consideration the Board discussed was the appropriate roles of monetary policy and fiscal
policy in response to the nature of the shock we are experiencing. This shock is largely the result of
government efforts to contain the movement of people and economic activity. It is also expected to
be only temporary, given the expected easing of containment measures over coming months.
Throughout the pandemic, the RBA has seen its role as being part of the national effort to build a
bridge to the other side and make sure that the economy is well placed to rebound strongly when
the time comes. As I discussed earlier, the package of policy measures introduced over the past year
has helped build that bridge. Having already put that package in place, our assessment was that
fiscal policy is the more effective policy instrument in responding to the Delta outbreak. This is
because fiscal policy can use the public balance sheet to offset the hit to private incomes during the
lockdowns. In contrast, monetary policy works mainly on the demand side and the effects on income
are felt with a lag; realistically, there is little we can do to offset the hit to demand in the September
and December quarters. This is the role of fiscal policy and indeed there has been a sizeable and
welcome fiscal response.
A third and related issue we considered was that by continuing to purchase government bonds at the
rate of $4 billion a week we will be adding to the support provided to the economy during the
recovery phase. The evidence suggests that the expected stock of central bank bond purchases
matters more than how many bonds the central bank buys each week. By February, our cumulative
purchases under the bond purchase program will have amounted to $275 billion. We will hold around
35 per cent of the Australian Government bonds on issue and 18 per cent of the state and territory
bonds. The RBA's purchase program started later than that of most other central banks but recently
has been expanding faster relative to the stock of bonds outstanding (Graph 9). This represents a
substantial and ongoing degree of support to the economic recovery.
Graph 9
Central Bank Government Bond Holdings*
Per cent of eligible stock outstanding
% %
Japan
Sweden
UK
40 40
Euro area**
US
20 20
Canada
Australia
NZ
0 0
2017 2019 2021 2017 2019 2021
*
Central government debt only for all countries except the euro area.
Dashed lines represent forecasts based on announced purchase
programs, recent pace of purchases, or market expectations in the
case of US and Canada
**
Holdings data for euro area only include bonds held as part of asset
purchase programs; holdings for other central banks also include
bonds held for operational or liquidity purposes
Sources: Central banks; debt management offices; RBA; Refinitiv
I would now like to turn to the more traditional part of our monetary policy package - that is, the
setting of the cash rate.
As I have discussed on previous occasions, last year we moved to an approach under which actual
inflation, rather than forecast inflation, plays the more central role in our cash rate decisions. In
today's low inflation world we do not want to run the risk that we increase the cash rate on the basis
of a forecast that ultimately does not come to pass, leaving inflation stuck below the target band. We
want to see actual results, not forecasted results, before we lift the cash rate. Once we do see these
results, forecasts of inflation will again have a role to play. But we have to get there first.
In particular, the Board has said that it will not increase the cash rate until actual inflation is
sustainably within the 2-3 per cent target range. It won't be enough for inflation to just sneak across
the 2 per cent line for a quarter or two. We want to see inflation around the middle of the target
range and have reasonable confidence that inflation will not fall below the 2-3 per cent band again.
Our judgement is that this condition for a lift in the cash rate will not be met before 2024.
Meeting this condition will require a tighter labour market than we have now. Our assessment is that
wages will need to be growing by at least 3 per cent. We remain well short of this. Even in industries
where there has been strong demand for labour, wage increases remain mostly modest. This
assessment was confirmed by the latest reading of the Wage Price Index, which showed an increase
of just 1.7 per cent over the year to the June quarter, with wages growth slower than this in the
public sector (Graph 10).
Graph 10
Wage Price Index Growth
% %
Private sector Public sector
5 5
4 4
3 3
Year-ended
2 2
Quarterly
1 1
0 0
2001 2011 2021 2001 2011 2021
Source: ABS
Our judgement is that it will take some time for wage increases to lift to a rate that is consistent with
achieving the inflation target. There is a lot of inertia in the wage-setting process and the experience
of the past decade is unlikely to be reversed quickly. This inertia comes from among other things:
multi-year employment contracts; a strong cost-control mindset of Australian business; and low and
stable inflation expectations.
This judgement stands in contrast to the expected path of the cash rate implied by market pricing
(Graph 11). The current OIS curve implies a cash rate of around 25 basis points by end of 2022,
60 basis points at the end of 2023 and close to 100 basis points at the end of 2024. These
expectations are difficult to reconcile with the picture I just outlined and I find it difficult to
understand why rate rises are being priced in next year or early 2023. While policy rates might be
increased in other countries over this timeframe, our wage and inflation experience is quite different.
Cash Market Rates
% %
Cash rate
Corridor floor
Implied cash rate - OIS
Cash rate target
1.0 1.0
0.5 0.5
0.0 0.0
2020 2021 2022 2023 2024
Sources: Bloomberg; RBA
Finally, I would like to address the question of housing prices, as some analysts have suggested we
might lift the cash rate to cool the property market. I want to be clear that this is not on our agenda.
While it is true that higher interest rates would, all else equal, see lower housing prices, they would
also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances.
That is not to say that there aren't public policy issues to be addressed here. On the financial side,
the issue is the sustainability of trends in household borrowing. We are continuing to watch this
closely, with the Council of Financial Regulators discussing possible regulatory steps if lending
standards deteriorate or credit growth accelerates too much.
More broadly, society-wide concerns about the level of housing prices are not best addressed
through increasing interest rates and curbs on lending. While monetary policy is contributing to
higher housing prices at the moment, the way to address these concerns is through the structural
factors that influence the value of the land upon which our dwellings are built. The factors include:
the design of our taxation and social security systems; planning and zoning restrictions; the type of
dwellings that are built; and the nature of our transportation networks. These are all obviously areas
outside the domain of monetary policy and the central bank.
Our job is to achieve the inflation target and support the return to full employment in Australia. The
package of policy measures we have put in place has us on a path to do that. Delta is delaying
progress, but it is not expected to derail our resilient economy.
Thank you for listening and supporting the Anika Foundation. I am happy to answer your questions.
[*] I would like to thank Penny Smith for assistance in preparing this talk.
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