JobKeeper extension; RBA stays the course
Reserve Bank Board minutes; Speech by Reserve Bank Governor

Reserve Bank Governor speech: The Governor spoke on the topic: “COVID-19, the Labour Market and Public-sector Balance Sheets.”

Reserve Bank Board minutes: The Reserve Bank Board assessed international experience at the July meeting and agreed that there was no need to adjust the package of measures.

JobKeeper extension: The JobKeeper wage subsidy scheme will be extended to March 28, 2021. The estimated cost of JobKeeper was revised up from $70 billion to $86 billion. The COVID-19 supplement and JobSeeker extension cost an additional $3.8 billion.

The Reserve Bank Board minutes are important in gauging policy settings.

What does it all mean?

• At the last meeting, the Reserve Bank Board asked the natural question: should we be doing more or doing things differently? And the conclusion was no, there was no need currently to change the policy package announced in March. And, as if to pre-empt further questioning, the Reserve Bank noted that it would “remain extraordinarily unlikely” to see negative interest rates being introduced in Australia. Hopefully that ends the debate for now.

• Today the Federal Government announced “it is extending the JobKeeper Payment until 28 March 2021 and is targeting support to those organisations which continue to be significantly impacted by the Coronavirus. From 28 September 2020, eligibility for the JobKeeper Payment will be based on actual turnover in the relevant periods, the payment will be stepped down and paid at two rates.”

• The extension of the JobKeeper scheme and scaling back of support payments was always going to happen if circumstances warranted. And the lift in the number of new COVID cases in Victoria (and to a lesser extent NSW), highlights the need to keep the payments flowing for a little longer.

• There is always a balance required between helping employers and employees genuinely in need and extending payments for too long, thus lifting the economic cost to the nation. The right balance seems to have been found, but that doesn’t mean that further changes will need to be made.

• The Reserve Bank Governor has always been an optimist and that hasn’t changed under COVID-19: “the foundations of the Australian economy are strong and that at some point the pandemic will pass. We have handled the health crisis better than many other countries and our economy is also faring better than many others.”

• The Governor sought to stress that all monetary policy options have been considered, but the best approach was to stay the course with the current policy package. The Governor effectively said that monetary policy can’t really do much more. Options include things like cutting the cash rate to 10 basis points; making more bond purchases; expanding the term funding facility. None of those measures are contemplated currently.

• But that wasn’t the case with fiscal policy. The Governor believes that there is good scope for Australian governments to borrow more – especially with interest rates the lowest since Federation.

• The Governor applauded the Government’s decision to rejig and extend the JobKeeper and JobSeeker payment arrangements.

• The Reserve Bank Governor has been encouraged by the amount of mortgage refinancing, allowing borrowers to lock in a lower interest rate and unleash greater spending power. The Governor has also been pleased at the response of the housing market to the virus crisis.

What do the reports and figures show?

Minutes of the Reserve Bank Board meeting held on July 7

• The Decision: “The Board reaffirmed the elements of the policy package announced on 19 March 2020, namely:

a target for the cash rate of 0.25 per cent

a target of 0.25 per cent for the yield on 3-year Australian Government bonds

the Term Funding Facility to support credit to businesses, particularly small and medium-sized businesses

an interest rate of 10 basis points on Exchange Settlement balances held by financial institutions at the Bank.”

• The Board affirmed that the target for three-year yields would be maintained until progress is made towards the Bank’s goals of full employment and the inflation target, and that it would be appropriate to remove the yield target before the cash rate itself is raised. The Board determined that it would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.”

• Policy package: “Members agreed that the Bank’s policy package was continuing to work broadly as expected.”

• International experience: “After reviewing experience both overseas and in Australia, members agreed that there was no need to adjust the package of measures in Australia in the current environment.”

• Bond purchases: “the Bank had not purchased government bonds for some time, although it was prepared to scale up these purchases again, if necessary, to achieve the yield target and ensure bond markets remain functional.”

• Economic assessment: “economic conditions had stabilised and the downturn had been less severe than earlier expected. There had been a pick-up in consumer spending in response to the decline in infections and the easing of restrictions across most of the country.”

• “…timely indicators of economic activity had generally picked up, suggesting that the worst of the global economic contraction had passed. However, the outlook remained uncertain and would depend upon containment of the virus.”

• “…the downturn had been less severe than feared a few months earlier. Consumer spending in May and June had been stronger than expected, and had also held up better than in most other countries. Manufacturing and construction activity had also been less affected in Australia than elsewhere. Similarly, the contraction in the labour market had been less severe than expected in May. Nevertheless, the shock to the Australian economy would be the most severe since the 1930s, and the outlook remained highly uncertain as it depended in large part upon containment of the pandemic.”

• Negative interest rates: “Members agreed that negative interest rates in Australia remain extraordinarily unlikely.”
JobKeeper Scheme

Key points

• From 28 September 2020, eligibility for the JobKeeper Payment will be based on actual turnover in the relevant periods, the payment will be stepped down and paid at two rates.

• The JobKeeper Payment will be extended until 28 March 2021 and the Government is targeting support to those organisations which continue to be significantly impacted by the Coronavirus.

• “From 28 September 2020, organisations seeking to claim JobKeeper payments will be required to reassess their eligibility for the JobKeeper extension with reference to their actual turnover in the June and September quarters 2020. Organisations will need to demonstrate that they have met the relevant continuing decline in turnover test in both of those quarters to be eligible for JobKeeper from 28 September 2020 to 3 January 2021.

• Organisations will need to further reassess their eligibility in January 2021 for the period from 4 January to 28 March 2021. Organisations will need to demonstrate that they have met the relevant continuing decline in turnover test in each of the previous three quarters to remain eligible for the March 2021 quarter.

• The JobKeeper payment rate is to be reduced and paid at two rates: >From 28 September 2020 to 3 January 2021, the payment rate will be $1,200 per fortnight for all eligible employees who, in the four weeks before 1 March 2020, were working in the business for 20 hours or more a week on average and for business participants who were actively engaged in the business for more than 20 hours per week, and $750 per fortnight for employees who were working in the business for less than 20 hours a week on average and business participants who were actively engaged in the business less than 20 hours per week in the same period.

• From 4 January 2021 to 28 March 2021, the payment rate will be $1,000 per fortnight for all eligible employees who in the four weeks before 1 March 2020, were working for 20 hours or more a week on average and for business participants who were actively engaged in the business for more than 20 hours per week, and $650 per fortnight for employees who were working for less than 20 hours a week on average and business participants who were actively engaged in the business for less than 20 hours per week in the same period.”

• The Prime Minister’s Media Release includes details on the COVID-19 supplement and changes to JobSeeker. The PM noted that the new arrangements for the JobKeeper Payment are expected to cost an additional $16.6 billion. The new arrangements for the Coronavirus Supplement are expected to cost an additional $3.8 billion.”

Reserve Bank Governor speech: “COVID 19, the Labour Market and Public-sector Balance Sheets.”

• Outlook: “the foundations of the Australian economy are strong and that at some point the pandemic will pass. We have handled the health crisis better than many other countries and our economy is also faring better than many others.”

• The Governor discussed a number of proposals that advocates claim could add support to the economy such as “helicopter money” (putting money in peoples’ bank accounts). But the Governor rejected all the proposals, concluding that there was “no free lunch”.

• Fiscal policy: “Looking forward, we should have confidence that the pandemic will pass, either because of scientific breakthroughs or we become better at managing the effects of the virus. Until it does pass, our incomes will be temporarily lower and it makes sense to smooth this out through fiscal support.”

• Foreign debt: “At some point in the future, attention will rightly return to addressing the ratio of public debt to GDP, as low levels of public debt do give us the capacity to use the public balance sheet to smooth out future shocks to private income. When the time does come to address the build-up of debt, the best way to do this will be through economic growth.”

What is the importance of the economic data?

• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for investors?

• The Reserve Bank Board has done a stocktake and concluded that there was no need to do anything more on monetary policy. So interest rates are set to stay low for many years. The Bank will release its updated economic forecasts on August 7, 2020.

• The Reserve Bank Governor was asked a question on the level of the Australian dollar and he indicated no current concern with levels near US70 cents. That said, Dr Lowe did say that he would prefer to see a lower dollar, but is reluctant to intervene in currency markets.

• The removal of uncertainty with the JobKeeper/JobSeeker announcement will support consumer confidence and spending, and underpin the outlook for consumer-focussed businesses.

Published by Craig James, Chief  Economist, CommSec