MNI POLICY: RBA Ellis: Uncertain What Australia's NAIRU Is

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia Assistant Governor Luci gave a

speech at the Australian National University in Canberra on Friday on the topic

"On Lags."

     Below are the key observations we made from the speech:

     --Ellis talked about the lags in the labor market which make it difficult

to know at what level of employment wage growth would pick up. Ellis said that

it might just take a while before firms start to realise how hard it is to find

suitable labour, and decide to offer higher wages. "So it could be that it takes

a little while for wages to pick up once unemployment has fallen below the

NAIRU."

     But there could also be a situation where employers change their definition

of "suitable labor" and start hiring people they previously didn't consider. In

such a situation the jobless rate could fall before wages start to rise. In

other words, the NAIRU falls, Ellis said.

     --Ellis talked about the risk of lowering the cash rate further to generate

faster decline in unemployment. She said that such a decision depends on whether

a particular level of interest rates induces households to keep increasing debt

indefinitely, or whether debt instead accumulates up to some point, or some

relativity to income, and no further. Interestingly she pointed to a 2003

research by RBA which showed that based on the experience of recent decades, and

the arithmetic of debt-servicing burdens, households do not accumulate debt

indefinitely.

     --Ellis reiterated the RBA's message that the next move in interest rates

is more likely to be up. In this context, she made a case for "fulsome and

frequent" communication by the RBA. But Ellis also suggested that such

communication needs to go beyond RBA's public commitments to a nominal anchor

such as an inflation target, to its explanation on how it interprets economic

developments. This "creates a public good," she said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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