Monetary policy and COVID set to steal focus in 2021

COVID, monetary policy, and the appointment of Joe Biden as the next US president will likely be the ‘Big Issues’ in 2021, according to CommSec’s chief economist, Craig James.

CommSec recently published its 20^th annual Big Issues report which highlights the key items that are expected to influence the economy and financial markets over the forthcoming 12 months.

The current coronavirus pandemic, which has dominated news headlines and impacted global economies throughout 2020, is likely to remain a big issue in 2021.

“Europe and the US are currently experiencing second waves of the virus, driving case numbers to record highs and necessitating fresh lockdowns,” Craig James said.

“The good news is that an effective vaccine is expected to be distributed across the globe, with vaccinations already commencing in the UK. And treatments for the virus are also being developed.  The economic outlook will clearly be dictated by the virus and how quickly vaccines can stem case numbers and allow economies to start repairing.”

In addition to the progression and potential eradication of COVID, Mr James said another key focus for 2021 will be the inauguration and subsequent presidency of Former US Vice-President, Joe Biden.

“Investors hope that US President-elect Biden announces a stimulus package of at least US$1 trillion, which could boost US economic growth, returning the economy to pre-pandemic levels by the end of 2021,” he said.

“As President, Joe Biden could introduce tougher financial regulation and impose anti-trust measures on big technology companies. His engagement with China on trade issues will also be a key focus along with his foreign policy objectives in the Middle East. This is of especial importance to Australian businesses and investors. The global economy slowed over 2019 as the Trump trade war soured US-China relations, creating uncertainty for businesses and financial markets. Most observers believe that Biden will adopt a tough but conciliatory stance with China rather than a ‘tit-for-tat’ tariff battle.”

Lastly, Mr James said while the Reserve Bank is expected to keep interest rates “super low for some time”,  the focus for this year will be on forward guidance; monetary policy objectives; and the increased use of fiscal policy in managing the economy in conjunction with monetary policy.

“While monetary policy was once all about adjusting interest rates (or the price of money) that is no longer the case.” he said.

In a recent address to the Committee for Economic Development of Australia Annual Dinner, Reserve Bank Governor, Philip Lowe, said: “The RBA is now undertaking QE, or quantitative easing, as many other central banks are also doing. Quantities and prices are obviously connected, so QE works partly through affecting the price of money, including long-term risk-free interest rates. But there are other effects too. When the central bank increases the quantity of money and buys assets, liquidity in the financial system is increased and investors in the private sector need to purchase other assets with the proceeds of the bonds they sell to the central bank. These portfolio adjustments can affect the price of other assets and international capital flows, as well as the exchange rate.”

Mr James said the aim of the RBA’s focus on bond buying or quantitative easing is to “drive longer-term interest rates lower, reducing the debt servicing costs for governments and to reduce funding costs for banks. Borrowing costs for Aussie households and businesses are at rock bottom, driving a housing market recovery, while encouraging firms to invest and hire workers. Policy is primarily focused on job creation to reduce scarring in the labour market.”

To hear more of Mr James’ predictions for the year ahead, listen to the podcast below.