Daniel Moss

If This Is the Covid Recovery, Then Steel Yourself

The Reserve Bank of Australia just placed a bet on a long and arduous climb back from the coronavirus pandemic. The rest of the world should take note.

Rather than greeting a return to growth by pulling back on easy money or laying the ground for doing so, the central bank is loosening some more. The RBA lowered its benchmark interest rate on Tuesday to 0.1% from 0.25%, and made a cut of the same magnitude to its target for the three-year government bond yield. The bank also launched a six-month $70 billion bond-buying program aimed at debt with maturities of around five to 10 years.

The decision signals a lack of conviction in the recovery, a week after Deputy Governor Guy Debelle said gross domestic product probably rose in the third quarter. That would mark an exit from recession if borne out by official numbers next month. Nobody in the RBA or Prime Minister Scott Morrison’s government is pretending the days of economic nirvana are returning Down Under, though. It's likely to be years before the bank lifts interest rates. Further moves to support growth are far more likely.

Australia’s stance reflects a new global monetary-policy paradigm in which reviving the labor market has supplanted inflation as the primary concern. Officials worldwide are haunted by the way inflation didn't fire as anticipated after the extraordinary stimulus unleashed following the global financial crisis. Then, rate increases based on expectations of higher prices proved mistaken.

The change in thinking was on visible display in August when the US Federal Reserve unveiled a new framework that would allow the pace of price increases to exceed its 2% target for a while.

The Fed's shape-shifting got the most attention, given its role as guardian of the world's reserve currency. Similar shifts, though, have been in the works elsewhere. Since the pandemic began, RBA Governor Philip Lowe has been steadily elevating the role of employment in the central bank’s deliberations — and downplaying inflation. While its mandate nods to jobs as well as price stability, in practice the latter has received the most attention over the decades. The same was true for global counterparts.

Lowe went as far as to say last month that he wants to see inflation move, not merely sense it creeping up. He is far more interested now in real price increases, not expectations of where they are going. In a year of public health and economic upheaval, this is a small-scale earthquake. But it will guide policy for years to come.

In the years after 2009, the biggest global policy error was early withdrawal of stimulus. That applied most in the fiscal arena, but budget crunchers weren't the only sinners. This time, there is little reason for prevarication. The RBA acted boldly in March, doing something few people thought conceivable in Australia: embarking on yield-curve control, a form of quantitative easing developed in Japan, and bringing interest rates to within shouting distance of zero. The RBA didn’t do a whole lot more in the months afterward. To a degree, Tuesday’s actions can be portrayed as catchup.

Keeping the monetary pump going is a prayer that loose policy will work best when there are tailwinds, rather than headwinds. The massive easing by central banks didn't by itself return many economies to growth; it did help put a floor under them and prevent a public health crisis morphing into a financial crisis. Now, with a tentative recovery visible, the hope is policy can gain traction.

It would be a stretch to say that global commerce is about to be turbocharged. Efforts to suppress Covid-19 have left a deep economic hole; this is a glass-half-empty recovery, as I wrote here. Business and households need all the help they can get. The central bank rethink typified by the RBA is no panacea; it is welcome nevertheless. Let’s see how much lifting it can do.