Over the last two years, all facets of Australian life have been overshadowed by the COVID-19 pandemic. Australian governments responded to the public health emergency by implementing widescale lockdowns, introducing social distancing measures, and closing borders. These measures were, for the most part, necessary and saved innumerable lives. At the same time, the public health response also precipitated the most serious economic crisis Australia has faced in recent history and saw it enter recession for the first time in nearly 30 years.
The Commonwealth Government reacted to the economic crisis with massive fiscal stimulus, amounting to seven or eight per cent of Gross Domestic Product (GDP), with state and territory governments adding another two per cent to this. This stimulus was instrumental in ensuring that Australians, whose livelihoods were imperilled by the crisis, could pay their mortgages and utility bills and feed their families. Crucially, the Government’s JobKeeper program allowed businesses to keep employees on their payrolls, enabling a smooth return to work once lockdowns were lifted and businesses re-opened.
In conjunction with the federal and state and territory government fiscal stimulus packages, the Reserve Bank of Australia (RBA) responded to the COVID-19 emergency with unprecedented monetary policy measures. In March 2020 the RBA dropped the already historically low cash rate to 0.25 per cent, and in November 2020 again to 0.1 per cent. Also in March 2020, the RBA announced a 0.25 per cent target for the yield on 3-year Australian Government bonds, which was also reduced in November 2020 to 0.1 per cent, and commenced a Government Bond Purchase Program aimed at lowering the costs of lending across the economy. Complementing these measures, in March 2020 the RBA also instituted a Term Funding Facility scheme to provide cheap credit to the banking system to enable it to support small and medium-sized enterprises with the provision of low-interest business loans.
On the back of these coordinated fiscal and monetary policy responses, the Australian economy has rebounded strongly. The economy is back to positive growth, and we are experiencing the lowest rates of unemployment since before the Global Financial Crisis in 2008, with the latest unemployment figure at 4 per cent. The underemployment rate has also seen a gradual decline since the height of the pandemic in 2020, now down to 6.6 per cent. While wage growth remains subdued, the tightening of the labour market is expected to see gradual upwards pressure on wages in coming years.
While the solid recovery of the Australian economy is a cause for optimism, significant threats to our economic prosperity remain. The Russian invasion of Ukraine in February 2022 is not only a threat to the rules-based international order, it also poses significant economic challenges for the global economy, Australia included. We have already seen massive increases in the price of fuel as a direct consequence of Russia’s aggression and we can anticipate more generalised price rises ahead.
The extent and severity of these prices rises for Australia, however, remains uncertain. While inflation continues to be muted across Asia and underlying inflation in Australia has just reached the mid-point of the RBA inflation target for the first time in seven years, the US is currently seeing inflation at a 40-year high and the Federal Reserve has recently raised the cash rate in an attempt to take some of the heat out of the US economy. The UK and Europe are facing similar inflationary situations. All of this intensified by war in Ukraine.
Keeping inflation on consumer goods in check while maintaining the buoyancy of the Australian economy will be a central challenge for the RBA in the coming months and years. And this committee will continue to be right there, assessing the Bank’s performance in maintaining this precarious balancing act and the appropriateness of the Bank’s inflation target over the medium term of between two and three per cent.
Australian house prices, meanwhile, remain at all-time highs, with residential property prices rising by 23.7 per cent over the past 12 months. This rise has largely been pushed by over-regulation and inflexible zoning requirements that have stunted housing supply. Inaction by governments on regulatory reform to increase the supply of housing has effectively priced young Australians out of the housing market and will result in an increase in inter-generational inequality. Record house prices mean that Australians have had to borrow more and more to achieve the Australian dream of home ownership. While interest rates are at all-time lows, increasing inflation may see the RBA raise the cash rate sometime this year. Any increase in the cash rate could place many people, already burdened with debts many times their annual salaries, into financial hardship as they see their mortgage repayments increase significantly. The committee will continue to scrutinise closely the full impact of RBA decisions on the Australian people.
Growth in the global economy will be propelled, more than ever before, by technological innovation. Often, the regulatory framework lags behind changes pushed by technology, such as that relating to digital wallets and the domination of that sector by companies such as Apple. It is crucial, therefore, that regulation in this country keeps pace with technological change and remains fit-for-purpose, promoting competition and the interests of Australian consumers. While the rising importance of digital currencies is another area of technological innovation that the RBA must keep abreast of to ensure the best outcomes for the health of our economy.
The monetary policy response of the Reserve Bank to the current uncertainties the nation faces will remain critical for the resilience of the Australian economy. Given the magnitude of the RBA’s potential impact on the Australian economy and, by extension, the well-being of our population, demanding transparency from the RBA in its decision-making continues to be of vital public interest. The committee will continue to play its role in holding the Bank to account before the Australian parliament and people.
Mr Jason Falinski MP
Chair
March 2022