Mid-2021 economy likely to experience a “soft patch”: Bill Evans

EXPERT OBSERVER

The success of vaccine tests; Australia’s current strong growth story; and pivots around monetary policy are highly relevant to the market outlook.

The approach to monetary policy in Australia is changing.

In his speech last Monday, the Governor neatly set out the four aspects of current policy.

The nature of forward guidance – “we have now moved to place much more weight on actual outcomes rather than forecast outcomes". A reasonable interpretation here is that particularly due to the combination of globalisation and technology the functioning of labour markets has changed and the need to be pre-emptive with policy has dissipated.

It is now appropriate to wait to see inflation firmly within the 2–3% band AND high wages growth, requiring a return to a tight labour market. Arguably he is making the “tight labour market” a necessary condition so, if for example a spike in inflation resulted from a supply shock then that would be an insufficient condition to raise rates.

Consistent with the above view he emphasises the RBA’s mandate – price stability; full employment; and economic welfare. He confirms the sentiment in 1) by emphasising the need to reduce spare capacity in the labour market – jobs are the central focus and success with jobs will lead to progress on the inflation front.

He discusses “the gravitational pull of low global interest rates” – if that pull, which reflects the global excess of savings over investment, is overlooked developments around the exchange rate and the economy would be adverse.

However, in the Q&A he again describes negative rates as “extraordinarily unlikely” since they make it “harder for banks to lend” although he does accept that the gravitational pull represented by any future decision of the US Federal Reserve to go negative would cause a rethink.

BILL EVANS is the Chief Economist at Westpac