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Reuters reports that ”Australia’s economic outlook has improved markedly thanks to the successful suppression of the coronavirus, but even under the most optimistic assumptions wage growth and inflation will still be too low by mid-2023, the country’s central bank warned on Friday.”

Reuters is referring to the Statement on Monetary Policy, whereby the Reserve Bank of Australia (RBA) said it was committed to keeping policy “highly supportive” until core inflation moved into its 2-3% target band, which was unlikely until 2024 at the earliest, Reuters reports. 

Key quotes

”In its central scenario, the economy would grow by 3.5% both this year and next, driving unemployment down to 5.25% by mid-2023 with core inflation rising to 1.75%.”

”In an upside scenario, positive health outcomes would help push unemployment down to 4.75% by the end of 2022.”

“;Inflation would also rise a little faster, but would still be below 2% by the end of the forecast period in mid-2023′ the Statement showed.”

”In its central forecast, annual wage growth does pick up from the current record-low pace around 1.25%, but only reaches 2% by mid-2023. The bank has long assumed wage growth would need to run between 3% and 4% to get inflation above 2%.”

That in turn would require the jobless rate to fall to 4.5% or lower, a long way from the current 6.6% level.

With that in mind, the bank decided to extend its bond buying program by another A$100 billion at its Board meeting this week and keep interest rates at their historic low of 0.1%.

Many analysts now assume the bank will further extend its quantitative easing program later this year, given the sheer scale of challenge in driving wages and inflation higher.

The RBA itself fears such an outcome will not be achieved by 2024 at the earliest, suggesting policy could remain super-easy for another three whole years.

That cautious assessment comes even though the economy has recovered from last year’s coronavirus lockdowns much quicker than previously expected.

The RBA now believes gross domestic product (GDP) fell only 2% last year, compared to a previous forecasted fall of 4%.

Success in containing the virus along with massive monetary and fiscal stimulus has boosted household incomes and spending and set off a boom in house prices and construction.

Having first feared unemployment could reach 10% or more, the RBA now believes the jobless rate has already peaked. One uncertainty, however, is how consumption will respond once the government begins to taper some of its fiscal support from March onwards, the RBA said.