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Reserve Bank bracing for biggest economic decline in decades

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Reserve Bank governor Philip Lowe expects economic growth to contract by seven per cent when the June quarter figures are released.

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Dr Lowe expects next month’s data to reveal the biggest decline in many decades as a result of the coronavirus pandemic.

“If there is any good news to be found here, it is that this decline is not as large as initially feared,” he told a parliamentary hearing on Friday.

“Similarly, while the labour market outcomes have been poor, they have not been as bad as expected.”

Dr Lowe reiterated the central bank’s expectation the unemployment rate will reach 10 per cent.

The jobless rate has risen to 7.5 per cent, with the number of people unemployed topping one million for the first time.

Economic growth is expected to contract six per cent in 2020 before expanding by five per cent next year and four per cent the year after.

Unemployment is still expected to remain about seven per cent at the end of 2022.

The Reserve Bank has kept the cash rate at a record low of 0.25 per cent since March and has been buying bonds to maintain liquidity in the market while keeping a lid on interest rates.

The central bank has indicated it will not increase the cash rate until progress has been made towards full employment and inflation returns to the two to three per cent target.

“These conditions are not likely to be met for at least three years,’ Dr Lowe said in his opening statement.

He dismissed suggestions the Reserve Bank should create money to directly finance spending.

“I want to make it clear that monetary financing of the budget is not on the agenda in Australia,” he said.

“There is no free lunch. There is no magic pudding. There is no way of putting aside the government’s budget constraint permanently.”

-AAP

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