REPEAT:MNI ANALYSIS:NAIRU May Become RBA Focus On Wage Concern

Repeats Story Initially Transmitted at 07:06 GMT Nov 9/02:06 EST Nov 9

--RBA Inflation Forecast Downgrade Mostly Due to CPI Re-weighting

By Sophia Rodrigues

     SYDNEY (MNI) - As the speed wage growth increasingly becomes the main worry

of the Reserve Bank of Australia, the debate is likely to shift to whether the

non-accelerating inflation rate of unemployment (NAIRU) is still 5% for

Australia or whether it has drifted lower.

     Given that NAIRU is an imprecise estimate, it is unlikely the RBA will

easily change its assessment but its commentary in the Statement on Monetary

Policy needs to be watched closely for any shift that the rate may be moving

towards 4%.

     Any shift is important for monetary policy because a rate lower than 5%

means there is more spare capacity in the economy will take longer to be

absorbed and that could means wage growth would take longer to pick up.

     Other things being equal, it means the cash rate could remain on hold for

still longer.

     The RBA currently estimates NAIRU at 5% but the 70% confidence interval

around this estimate is plus/minus one percentage point, which means it can be

fairly sure the rate lies somewhere between 4% and 6%. The RBA published this

assessment in a research paper in the June quarter bulletin.  

     Deputy Governor Guy Debelle discussed it again in a speech last month in

the context of uncertainties that the RBA has to factor in to its monetary

policy decision-making. He compared NAIRU to a neutral rate which is another

economic concept that can't be measured directly but is important for monetary

policy.

     The most important aspect of that discussion was Debelle pointing to

estimates of NAIRU continuing to be revised lower in the U.S., Germany and Japan

where jobless rates have gone below the previous estimates of NAIRU but wage and

price inflation remains subdued.

     At the current Australian jobless rate of 5.5%, there is still spare

capacity in the economy but if the labor market numbers continue with their

strong trend seen so far this year, the jobless rate could move towards 5%.

     The RBA has to consider this possibility in its forecasting process, and

whether NAIRU is likely to shift, or have shifted, below 5%. Based on wage and

inflation trends in other major economies in the past year, the estimate of

NAIRU, even if it is imprecise, has a greater implication for monetary policy.

     Debelle may have already pointed to this possibility in his speech, when he

said that the RBA's forecast is that the spare capacity in the labor market will

be reduced gradually in the period ahead. "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."

     The RBA's quarterly Statement on Monetary Policy is due at 11:30 am local

time (0030 GMT) Friday.

     The important things to look for in the statement will be replacement of

ranges for key forecasts with single figures, rounded to the nearest quarter

percentage point. Growth and inflation forecasts will be important but the

unemployment rate forecast will be particularly important this time.

     To have a better understanding, it will be more important to read the RBA's

confidence intervals around the forecasts.

     Debelle has already said not to place too much significance on small

forecast changes from quarter to quarter. 

     "That is, avoid falling into the trap of false precision," he said.

     "The sense of central tendency conveyed by the graphs is more important and

the accompanying text will continue to provide our 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," he said.

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