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RBA’s Harper Warns Against Stimulus Cold Turkey, Urges Taper

Michael Heath

(Bloomberg) --

Reserve Bank board member Ian Harper urged Australia’s government to come up with a “tapering arrangement” for its stimulus programs that are due to end in September, warning a sharp cutoff would damage the recovery and potentially drive unemployment even higher.

“The strongest form of Cold Turkey would be to cut back to where they were before,” Harper, one of six independent directors on the RBA board, said in an interview, who stressed he was speaking in a personal capacity. “That would have a significant negative effect on consumer confidence, on consumption behavior, and consumption’s 60% of the economy.”

Australia is at the forefront of developed nations navigating the reopening of its economy, requiring judgment calls on the risk of a second wave of infections and assessing the private sector’s ability to stand on its own. The signs are promising, with household sentiment strengthening and normality returning.

Harper said the government could potentially narrow the scope of its JobKeeper subsidy, which helps keep people attached to their employers, and assist others currently outside it, with a reduced rate of aid. He said if this is done, then the jobless rate won’t reach the worst predictions of 10%.

The government will deliver an update on the economic and fiscal outlook on July 23 that will set out its plans for JobKeeper and other fiscal programs.

Australia’s unemployment rate climbed to 7.1% in May as the economy shed more than 800,000 jobs in the past two months, data showed Thursday.

The RBA board member said ongoing assistance would probably need to be directed to sectors like tourism and education, given border closures are likely to remain for a prolonged period as most Covid-19 cases Down Under now originate offshore.

“That’s going to stay closed for quite some time,” he said of the borders. “That’s an issue for us as a trading economy, there’s no doubt about that.”

Australia’s success in containing the virus and the earlier-than-expected relaxation of restrictions has brought it into investor focus, with the currency surging since the March slump.

While the cash rate has been cut to 0.25%, the RBA’s QE program is much more limited compared with the Federal Reserve, the Bank of England and the Bank of Japan. Since March 19, when the RBA announced it would embark on QE, the Australian dollar surged 20%. It briefly broke through 70 U.S. cents, before easing back a little.

“It would certainly be unhelpful if the rate was back up over 70 cents, that’s for sure,” Harper said of the currency. “It might’ve been nicer if it was weaker for a little longer.”

As to the risks ahead, Harper said he’s less worried about the threats toward Australia from China that include tariffs on barley, suspension of purchases from some abattoirs and warnings to Chinese tourists and students about racism Down Under.

He said that China has been fairly aggressive with a number of countries, so Australia isn’t being singled out. It also isn’t banning people from studying Down Under or threatening to ban iron-ore exports, which would signal serious intent to cause damage. So China is more making clear that it’s unhappy at this point, he said.

Harper’s greatest fear is a second wave of the virus emerging Down Under and the economy needing to reimpose lockdowns.

“A whole lot of businesses wouldn’t be sustained a second time through, a lot of households wouldn’t be sustained a second time through and the government could not be as generous with its JobKeeper and other arrangements a second time through,” he warned. “If you add on top of that the devastating impact that would have on public confidence, that’s the one that really bothers me.”

(Updates with government’s July economic statement in fifth paragraph.)

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