With interest rates at ultra low levels, times certainly are hard for income investors.
Unfortunately for them, it may be some time before interest rates start to improve according to the Westpac Banking Corp (ASX: WBC) economic team.
In the latest Westpac Weekly economic report, the banking giant suggested that the Reserve Bank of Australia could leave the cash rate on hold at the record low until at least the end of 2023.
Westpac's chief economist, Bill Evans, commented: "Our view out to 2023 is based on our forecasts for the unemployment rate; inflation; and wages growth. It is also based on the assessment that central bank policy has moved towards being much less pre–emptive than in earlier periods."
Unemployment to remain higher.
The bank believes the most key factor will be Australia's unemployment rate, which is expected to rise strongly during the pandemic.
Mr Evan explained: "The most important forecast will be the unemployment rate. Unemployment is a key policy goal in its own right and the most important influence on inflation through the impact that spare capacity in the labour market has on wages and therefore inflation."
"We expect that the unemployment rate will hold around 6% in 2021–2023 – well above the 4.5% full employment rate. Accordingly wages growth, which we expect will slow to an annual pace of 1.5% by mid–2021, will fail to return even to the disappointing 2.5% we experienced before the advent of the Covid Crisis," he added.
Fiscal policy importance.
The chief economist believes that the Government's approach to fiscal policy will be very important.
Mr Evans suggested that the government should embrace growth orientated fiscal policies even if it delays the healing of the deficit and threatens Australia's AAA credit rating. He also believes personal tax cuts, which are currently scheduled for 2022, ought to be brought forward.
By not embracing growth oriented fiscal policy to address the current deficits, Westpac's chief economist believes it will only "exacerbate the unemployment problem."
Mr Evans commented: "A more expansionary approach to fiscal policy will be necessary but not sufficient. However, the aftermath of a global recession; damaged business balance sheets; and a sustained fall in permanent immigration are all formidable headwinds for the economy. These will be superimposed on the difficulties which were faced by the economy before the current crisis."
In light of this, Westpac doesn't expect any movement with the cash rate until at least the end of 2023.
