May RBA meeting: Unemployment to peak at 10%, remain above 7% next year

The Reserve Bank continues to monitor the current economic crisis as it unfolds, revealing it expects a contraction of around 10% in its May meeting this afternoon.

“The Australian economy is going through a very difficult period and there is considerable uncertainty about the outlook,” said RBA Governor Philip Lowe.

“In the baseline scenario, output falls by around 10% over the first half of 2020 and by around 6% over the year as a whole. This is followed by a bounce-back of 6% next year.”

The halt in commercial activity, necessary to contain the spread of the virus, has put extreme pressure on the economy, but the Board admits the Government’s stimulus measures have provided a much-needed buffer.

“They are supporting people's incomes, maintaining the important connections between businesses and their employees, underpinning the supply of credit to businesses and households, and keeping borrowing costs low,” Dr Lowe said.

But even with payroll guarantees like the JobKeeper scheme in place, the unemployment rate is expected to hit double digits.

“In the baseline scenario considered by the Board, the unemployment rate peaks at around 10 per cent over coming months and is still above 7 per cent at the end of next year,” Dr Lowe said.

“A lower unemployment rate than this is possible if the reduction in labour demand is accompanied by a larger reduction in average hours worked, rather than by people losing their jobs.”

The Board also considered scenarios in which the current restrictions are kept in place longer than expected or need to be reimposed due to a second wave of infections, in which case the outcome will be “even more challenging.”

As for the RBA’s bond purchasing program, the target yield of 0.25% on 3-year Australian government bonds has been reached and the Board has now scaled back activity on this front. To date, around $50 billion in bonds has been purchased.

“The Bank is prepared to scale-up these purchases again and will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for 3-year AGS,” Dr Lowe said.

Dr Lowe also stressed that the Board has reached the end of the easing cycle and is committed to keeping official interest rates unchanged at 0.25% for the foreseeable future.

“The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band,” he said.

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