RBA Debelle: Still Sizable Degree of Labor Mkt Spare Capacity

By Sophia Rodrigues

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

labor market and as it reduces, the Reserve Bank of Australia is alert to the

risk that inflation could continue to remain subdued, 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 market in the U.S., Germany and Japan where

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

(non-accelerating inflation rate of unemployment), and yet inflation remained

subdued.

     The RBA considers NAIRU to be at 5% and its "assessment is that there still

remains a sizeable degree of spare capacity in the labor market," Debelle said,

adding, the forecast is for spare capacity to gradually reduce in the period

ahead. The latest labor force survey from the Australian Bureau of Statistics

showed 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 mainly focused on uncertainties in monetary policy decision-making

and some of the main ways that uncertainty affects things, in the speech.

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

forecasts in the next Statement on Monetary Policy on November 10.

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

forecasts to the nearest quarter point.

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

inflation is 1.5% to 2.5% for year-ended December 2017, and 5% to 6% for

unemployment rate.

     But Debelle urged not to place too much significance on small changes from

quarter to quarter. Instead, he said it is important to focus on central

tendency conveyed by the graphs and the accompanying text as they will provide

the RBA's assessment as to 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, adding, "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 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 the estimates that a change in the policy interest

rate today has its peak impact on aggregate demand in about 12 to 18 months and

the peak impact on inflation is closer to two years.

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

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