There is no risk of the Australian government being unable to repay debt or of excessive inflation in the near term despite the Reserve Bank buying $40bn of government bonds, its deputy governor has said.
Guy Debelle made the comment on Tuesday in a speech confirming the success of unprecedented RBA interventions to stimulate the economy during the Covid-19 recession but warning further fiscal support will be needed from the government for “quite some time”.
With interest rates at rock-bottom levels of 0.25%, the RBA has undertaken quantitative easing, effectively creating money by purchasing government bonds.
On Monday, the former Labor trade minister Craig Emerson called on the RBA to buy bonds directly from the government rather than the secondary market, to inject even more money into the economy.
It comes as respected economics commentators increasingly cite Modern Monetary Theorist academics such as Stephanie Kelton to argue that inflation, not deficits, are the only limiting factor on government spending.
Debelle told the Economic Society of Australia in a webinar that the RBA has made more than $40bn of bond purchases, crediting banks’ accounts to provide a “substantial boost to the liquidity in the system”.
When bonds mature, the government repays the bonds to the RBA, reducing both the asset side of the RBA balance sheet and the government’s deposit account at the RBA.
“While the bond purchases by the RBA increase liquidity in the system, I do not see this posing any risk of generating excessively high inflation in the foreseeable future,” Debelle said.
“Indeed, the opposite seems to be the more likely challenge in the current economic climate, that is, that inflation will remain below the RBA’s target.
“Nor do I see any issue at all with the capacity of the government to repay the bonds it has issued.”
Debelle said despite rising debt to fund $134bn of fiscal stimulus, “the stock of government debt relative to the size of the Australian economy remains low” and borrowing costs “are very low historically”.
He cited the fact the interest rate charged to the Australian government is “considerably below the long-run growth rate of the economy”.
“While ever this remains the case … there are no concerns at all about fiscal sustainability from increased debt issuance.
“This is because growth in the economy will work to lower government debt as a share of nominal GDP.”
Debelle said that although the target cash rate is 0.25%, the “actual cash rate traded in the market” has declined to around 0.13-0.14%, and the market expects it will remain there until at least the next year.
He said this was consistent with the RBA’s view that inflation returning to the 2-3% target band “is likely to be some years away”.
Debelle said Australia’s economy has fared “better than earlier feared” although the impact of the recession is still “historically large”, meaning that monetary and fiscal support “was, and remains, warranted”.
He noted there is “considerable uncertainty” about the recovery from here, suggesting it is “quite likely” the decline will “require considerable policy support for quite some time to come”.
“While much of that support is likely to be on the fiscal side, the [RBA] will maintain the current policies to keep borrowing costs low and credit available, and stands ready to do more as the circumstances warrant.”
The Morrison government has deployed the rhetoric of shrinking government debt through economic growth, but has warned that fiscal stimulus like the $70bn jobkeeper wage subsidy is only “temporary medication”.
Labor’s Jim Chalmers has suggested the government should not withdraw economic supports too quickly, although Labor has also criticised the government for increasing debt and shadow ministers have been warned of ongoing “fiscal constraints” .
The Greens are campaigning on a platform of raising $300bn government debt to boost spending.