philip lowe : recent economic developments and outlook opening statement by mr philip lowe, governor of the reserve bank of australia, at the house of representatives standing committee on economics, canberra, 2 december 2020. * * * we welcome the opportunity for this additional hearing of the house economics committee. a lot has happened since the previous hearing, including further significant policy measures by the rba. this morning, i would like to explain why we took these additional measures and how they will help the recovery. to provide some context, i will begin with a summary of recent economic developments and the economic outlook. economic developments and outlook this year has been an extremely difficult one for many people and businesses. but we have now turned the corner and a recovery is underway. since we last met, the economic news has, on balance, been better than we were expecting. over recent months, the number of people with a job has risen significantly and the peak in the unemployment rate is now likely to be between 7 and 8 per cent, rather than close to 10 per cent. retail spending has also continued to increase, with consumers adjusting their spending patterns to the realities of a covid - 19 world. business and consumer confidence has also lifted and housing markets have generally proved resilient. given these developments, we are now expecting gdp growth to be solidly positive in both the september and december quarters. and then, next year, our central scenario is for the economy to grow by 5 per cent and then 4 per cent over 2022. these figures, though, cannot hide the reality that the recovery will be uneven and bumpy and that it will be drawn out. some parts of the economy are doing quite well, but others are in considerable difficulty. and 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. 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. one consequence of higher unemployment is that wage and price pressures are likely to remain subdued. in each of the next 2 years, we are expecting annual wages growth of less than 2 per cent. and inflation, in underlying terms, is expected to be just 1 per cent next year and 1½

, rather than forecast outcomes. this shift reflects the changing price dynamics in our economy due to globalisation and technology, and now the pandemic. the board will now want to see evidence that inflation is consistent with the target before it increases the cash rate. it is not enough for inflation to be forecast to be consistent with the target. in november, we announced another major policy package, including : reductions in the cash rate target, the 3 - year australian government bond yield target and the interest rate on new drawings under the term funding facility to 0. 1 per cent a reduction in the interest rate on exchange settlement balances at the rba to zero the introduction of a quantitative bond purchase program, under which the rba will buy $ 100 billion of government bonds over the next 6 months. as part of this program we are buying bonds issued by the australian government and the states and territories. these decisions, together with those made by the board earlier in the year, will support the recovery of the australian economy. they will keep funding costs low for households, businesses and governments. they are also complementary to the significant fiscal stimulus by the australian government and the states and territories. this fiscal stimulus has played a critical role in helping the economy through the pandemic and it has preserved hundreds of thousands of jobs. for our part, the rba ’ s recent measures will support the economy through a number of channels. lower borrowing costs free up cash flow for both households and businesses, some of which will be spent. lower interest rates also support asset prices, which boost balance sheets and consumption and investment. and a lower structure of interest rates leads to a lower value of the australian dollar than would otherwise be the case. the end result is a stronger economy and more jobs. 2 / 4 bis central bankers'speeches the decision to implement a bond buying program as part of the november policy package followed a careful review of the international experience. when we met last time, i said that my judgement was that a price - based target ( i. e., a yield target ) was preferable to a quantity - based target. that remains my view, but it doesn ’ t need to be an either / or choice and we can ’ t ignore what is happening overseas. as other central banks have bought government bonds under quantitative easing programs they pushed down the yields on those bonds. in turn, this put downward pressure on the value of their currencies. as a result, here in australia we found ourselves