Reserve Bank's Philip Lowe urges government to keep spending

Reserve Bank governor Philip Lowe appearing before the committee. Picture: Parliament House video feed
Reserve Bank governor Philip Lowe appearing before the committee. Picture: Parliament House video feed

Reserve Bank governor Philip Lowe says the JobKeeper scheme might need to be extended beyond six months and has urged the government to keep spending.

Also on Thursday, it was revealed that banks had deferred $250 billion in payments on home loans and business loans.

Mr Lowe told a Senate inquiry into the coronavirus that ending the JobKeeper wage subsidy and other stimulus too early could be damaging.

"It's too early to say what the economy going to be like in four months' time - but if we have not come out of the current trough in economic activity, there will be and there should be debate about whether the JobKeeper program transitions into something else or whether it's extended into specific industries, or somehow tapered," he said. "I think it's very important that we don't withdraw fiscal stimulus too early."

Mr Lowe suggested JobKeeper might become more targeted to industries that needed longer support, such as tourism that relied on international visitors.

Interest rates would remain where they were possibly for years, he said. The Reserve Bank would not increase interest rates until inflation was in the 2-3 per cent range, and Australia was back to full employment - which he said was an unemployment rate of between 4.5 and 5 per cent.

"It's reasonable to expect that that will not be for some years," he said.

"The way the world is at the moment, I have trouble seeing inflation sustainability within 2-3 per cent for quite some time, and I think it's going to be a long drawn-out process towards full employment. Which means we're going to keep interest rates where they are perhaps for years."

Mr Lowe said government spending (fiscal policy) would play a much bigger role in managing the economy than it had in the last 20 years.

The Reserve Bank was focused on keeping lending costs low and credit flowing, but there was a limit to what it could do, with interest rates already at the effective bottom rate.

"In the next little while there's not going to be very much scope at all to use monetary policy in that way so fiscal policy will have to be used, that's going to require a new mindset," he said, urging the government to keep spending. Withdrawing government spending too soon would be damaging.

"Hopefully that fiscal support will be there for a long period of time. If the economy recovers it can be withdrawn, but if it's long and drawn out it's going to be very important that we keep the fiscal support going."

The economy was tracking better than expected, but there were still "a lot of challenges down the track", he said. Even the best scenario was "pretty depressing", with weak employment, high unemployment and low inflation.

Australian Prudential Regulation Authority chairman Wayne Byres said banks had deferred $250 billion in payments on mortgage and small and medium-business loans for three to six months. About two-thirds of those were housing loans and about $60 billion was to businesses with debts of up to $10 million.

The authority was "very mindful" of the risks to banks of the schemes coming to a sudden end, in an environment where banking risks were already evident, he said.

"We cant keep pretending that everything is in good shape if there are customers who clearly are not going to be able to pay their loans, but clearly we don't want to put pressure on a large group of customers just at the wrong point in the cycle," he said.

"We often talk about the cliff, which is where everything end sin six months' time. No-one has an interest in going off the cliff so we have to work out what the next phase is going to be."


Mr Lowe supported Prime Minister Scott Morrison's announcement this week of a series of meetings to reach a consensus on changes to industrial relations laws, and reform to skills training, saying he had been "very pleased" to hear it.

He pointed also to other areas for reform, including income tax, the goods and services tax and land tax, and how infrastructure projects were chosen.

"You can waste a lot of money on ill-chosen infrastructure projects," he said, urging governments to do their cost-benefit studies properly and choose the best projects.

There had been no shortage of ideas and reports over the past decade on economic reforms, but Australia had lacked the political and social consensus to implement the ideas.

"If we don't tackle some of those issues we will just meander along, the economy will be OK, but we won't return to the kind of growth we have seen in our living standards over the last 20 years," he said.

In recent speeches, Mr Morrison has stressed the need to set aside political ideology and division in economic reforms.

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This story Reserve Bank boss urges government to keep spending first appeared on The Canberra Times.