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

allows both exporters and importers to engage productively in the economy. it also means that the economy ’ s growth is sustainable, that imbalances are neither generated that cause crises through over - heating nor throw the economy into severe downturns. all of this is clearly in the interest of all south africans. we implement this mandate through a flexible inflation targeting framework. we sometimes hear the objection that targeting inflation is bad for growth – that is, one page 7 of 10 part of our constitutional mandate conflicts with the other, and protecting the buying power of the rand is anti - development. however, low inflation is actually the ally of development. there are several reasons for this. low inflation helps maintain the value of the money in your pocket. this is good for all south africans, but especially the marginalised and poor – those without the information or power to protect themselves from inflation. low inflation also helps maintain the competitiveness of south african goods and services in foreign and domestic markets, by moderating real exchange rate appreciation. furthermore, low inflation produces lower interest rates. in summary, there is no long - term trade - off between growth or inflation. keeping inflation low, protecting the value of the currency, is supportive of growth. through history, some countries have tried to deny these truths, pretending that high inflation somehow begets sustainable growth. this kind of macroeconomic populism is usually a precursor to misery, not least because it impoverishes nearly everyone in society. the few who benefit are those that somehow are able to capture a dwindling supply of the necessities of life or gain privileged access to foreign currency ( for a short time ). neither the middle classes nor the poor of high inflation countries are likely today to be partisans of such an approach to policy. the impact of inflation on interest rates is often misunderstood. this is probably because the interest rate is our main tool for controlling inflation, so when interest rates rise the reason for this is typically higher inflation. sometimes people suggest that if we would just ignore the inflation, then interest rates wouldn ’ t have to move and we could have more growth. but as i explained in my speech at the university of kwazulunatal earlier in the year, interest rates incorporate compensation for expected inflation. for this reason, as the fisher equation states, the rate of interest is equal to expected inflation plus a real premium. if you have two identical countries, and one has a three percent inflation target and the other has