Brace for a heavy hit

THE Reserve Bank has conceded Australia will likely suffer a “very large economic contraction” this quarter amid the fallout from the coronavirus pandemic.

And the unemployment rate is expected to hit its highest level in “many years”, while the outlook is rife with uncertainty, RBA governor Philip Lowe says.

But Dr Lowe says the central bank may soon scale back its money-printing program as it has the desired affect on the economy.

As widely expected, the RBA board — in its first formal meeting since the central bank delivered an emergency rate cut mid last month — left the cash rate at its all-time low of 0.25 per cent yesterday.

In his statement after the meeting, Dr Lowe said there was “considerable uncertainty about the near-term outlook for the Australian economy”.

“Much will depend on the success of the efforts to contain the virus and how long the social distancing measures need to remain in place,” he said.

“A very large economic contraction is, however, expected to be recorded in the June quarter and the unemployment rate is expected to increase to its highest level for many years.”

Still, stimulus measures taken by the central bank and governments, coupled with support measures announced by banks, would mitigate the fallout “and help ensure that the economy is well placed to recover once the health crisis has passed”, Dr Lowe said.

The central bank had bought $36 billion in bonds previously issued by Australian governments as part of the package of stimulus measures announced on March 19, he noted.

Under that program, the central bank is effectively using freshly minted money to buy bonds as a means of pumping cash back into the economy and pushing down borrowing costs.

Dr Lowe said conditions in the government bond market had improved, and if that trend continued, it was likely “smaller and less frequent purchases of government bonds will be required”.

In a research report, Westpac chief economist Bill Evans said Dr Lowe had indicated he believed the RBA’s stimulus program had “been successful and we can only endorse that assessment”.

“However, it seems a little premature to be anticipating a return to stability,” Mr Evans said.