MNI POLICY: No Sign Of Medium Term Deflation - RBA Lowe

By Lachlan Colquhoun

     SYDNEY (MNI) - Inflation could "turn negative" in Australia, but there is

no sign of any medium term deflationary impact as a result of the pandemic

disruption, Reserve Bank of Australia Governor Philip Lowe said Tuesday.

     Speaking in Sydney, Lowe said that the fall in oil prices, combined with

domestic fiscal measures such as the introduction of free childcare and the

deferral of fees, was "quite likely" to result in negative inflation in June.

     This would be a temporary situation, he believed, and would be reversed by

2021 as the Australian economy recovered.

     Describing the pandemic disruption as a "once in a century event", Lowe

forecast a 10% decline in national output over the first half of 2020, with most

of the decline in Q2.

     He said unemployment was "likely to be around 10% by June," with the total

number of hours worked likely to decline by a "staggering" 20% over the first

part of 2020.

     Lowe also forecast an improvement in the economy on the assumption that

various restrictions would be eased towards the middle of the year, with most

removed by year's end.

     "Under this scenario we could expect the economy to begin its bounce back

in the September quarter and for that bounce back to strengthen from there,"

Lowe said.

     He said GDP could grow strongly next year, at between 6% and 7%, although

it was harder to make any forecasts on employment numbers.

     Lowe said the RBA had bought around A$47 billion in Government bonds so far

and had scaled back its purchases as the yield had settled at the Bank's target.

     In March, the RBA announced a program of buying Government and

Semi-Government bonds on the secondary market, with aim of driving the yield on

3-year Australian Government bonds to 0.25%.

     He ruled out any direct bond purchases and committed the Bank to buying on

the secondary market only, saying these purchases would "scale up" if needed.

     The RBA's cash rate was also likely to stay at the current record low of

0.25% for a "number of years".

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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