RBA Debelle: Alert If Infl. Subdued When Labor Slack Declines

By Sophia Rodrigues

     SYDNEY (MNI) - There is still a sizeable degree of spare capacity in the

labor market but the Reserve Bank of Australia is alert to the risk that

inflation could remain subdued even as that spare capacity declines, Deputy

Governor Guy Debelle said Thursday.

     Debelle made the comments in a speech at the Warren Hogan Memorial Lecture

in Sydney on the topic "Uncertainty."

     Debelle talked about the labor markets in the U.S., Germany and Japan,

where the unemployment rate has approached and gone below previous estimates of

NAIRU (the non-accelerating inflation rate of unemployment) and yet, in each

country, inflation remained weak.

     The RBA considers NAIRU to be about 5% for the Australian economy and its

"assessment is that there still remains a sizeable degree of spare capacity in

the labor market," Debelle said in the text of his speech. The RBA's forecast is

for spare capacity to gradually decline in the period ahead. 

     The latest labor force survey from the Australian Bureau of Statistics

showed the jobless rate fell to 5.5% in September from 5.6% in August.

     "But, as it is reduced, we will be alert to the possibility that these

developments we see in other labor markets, in terms of subdued inflation in the

face of minimal spare capacity, occur here too," Debelle said.

     Debelle's speech focused mainly on uncertainties in monetary policy

decision-making and some of the main ways that uncertainty affects the economy

and policy.

     He also used the speech to announce changes to the way the RBA will present

forecasts in its next Statement on Monetary Policy to be released November 10.

The RBA will replace ranges in the table of forecasts for key variables with

forecasts to the nearest quarter point.

     In the August statement, for example, the RBA's forecast for underlying

inflation is a range of 1.5% to 2.5% for year-ended December 2017, and a range

of 5% to 6% for the unemployment rate.

     But Debelle urged observers not to place too much significance on small

changes in the forecasts from quarter to quarter. Instead, he said, it is

important to focus on the central tendency conveyed by the graphs and the

accompanying text in the report as they will provide the RBA's assessment

whether the changes are material or not.

     "The monetary policy reaction is more likely to be affected by where the

actual outcomes for inflation and growth fall within those intervals in the

graph than whether or not the forecast in the table is actually achieved,"

Debelle said.

     "We will also continue to supplement this information with a discussion of

some of the uncertainties around the forecast. This gives some sense as to what

are some of the forces that could cause the outcome to depart from the modal

forecast," he said. "That is, they may be low probability events, but, if

realized, they would be highly consequential for the Australian economy."

     Some of these scenarios could be: "What would our forecasts look like (say)

if the exchange rate was 10 per cent lower than we assumed? Or if Chinese GDP

growth slowed sharply? Or if households save less income than we assumed?"

Debelle said.

     Debelle said it is important that there is a good understanding of what the

monetary policy reaction is likely to be so there can be reasonable surety about

how the central bank will respond given the outcomes for inflation, unemployment

and output that actually come to pass. 

     "They can have some confidence in saying: if I think this is my most likely

forecast for the economy, then it is likely that monetary policy will be

adjusted in this way. At the same time, it is important to note that the

monetary policy decision is 'not rigidly and mechanically linked to forecasts',

not least because of all the uncertainties I have just been discussing," he

said.

     Debelle reminded that a change in the policy interest rate today is

estimated to have its peak impact on aggregate demand in about 12 to 18 months

and the peak impact on inflation closer to two years.

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

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