Still too much slack in the labour market, says RBA deputy Debelle

http://www.afr.com/news/economy/still-too-much-slack-in-the-labour-market-says-rba-deputy-debelle-20171026-gz8ph0#ixzz4wbGWcyxx 

 

by Jacob Greber

Unemployment is still above the level at which inflation-busting official interest rates are needed, says Reserve Bank of Australia deputy governor Guy Debelle, who warned the nation may yet suffer the same advanced economy affliction of a breakdown between hiring and wages.

In a speech outlining plans by the Reserve Bank to make minor tweaks to the way officials present inherently tricky forecasts for growth, inflation and jobs, Dr Debelle said the labour market is still to weak to stoke inflation.

"There still remains a sizeable degree of spare capacity in the labour market," Dr Debelle said on Thursday.

The remarks come a day after Wednesday’s surprisingly soft September quarter inflation data, which showed few signs that wage pressures are pushing consumer prices back up into the Reserve Bank’s 2-3 per cent target range.

Financial markets betting implies investors have wound back rate hike expectations in recent days. At the start of the week there was a 40 per cent chance of a second official rate hike by November 2018. There is now only one full hike priced in for next year.

Part of the market’s view is driven by fear that despite a strong labour market – which has seen the jobless rate trend lower gradually both in Australia and abroad – structural changes such as automation and artificial intelligence mean declines in spare workers may not result in wages growth.

Dr Debelle noted that for a number of advanced economies unemployment rates have fallen below levels at which inflation begins to quicken, also known as the non-accelerating inflation rate of unemployment, or NAIRU.

Yet at the same time, wage and price inflation has remained subdued, forcing officials in countries like the US, Germany and Japan to continue to revise lower their estimated NAIRUs.

"This can, presumably, only go on for so long, as eventually the laws of supply and demand mean that as new workers become increasingly hard to find, companies will actually have to pay higher wages to fill jobs," he said in the speech.

He said the Reserve Bank was 70 per cent sure Australia’s NAIRU is currently between 4 and 6 per cent. The jobless rate in September was 5.5 per cent.

"Our forecast is that spare capacity will be gradually reduced in the period ahead," he said.

"But, as it is reduced, we will be alert to the possibility that these developments we see in other labour markets, in terms of subdued inflation in the face of minimal spare capacity, occur here too."

The remarks again support the view that the Reserve Bank is set to keep the official cash rate steady at 1.5 per cent over coming months, with officials from the central bank, Treasury, and other regulators hinting that they will tackle any rising financial risks caused by ultra-easy monetary policy through increased restraints on property lenders.

Dr Debelle’s speech was largely devoted to the challenges of managing monetary policy amid real world uncertainty. He noted that one of the biggest difficulties was the fact that changes in official interest rates take about 12 to 18 months to deliver their peak impact on economic growth. Inflation changes take closer to two years, he said.

"So, in thinking about the appropriate stance of monetary policy today, we need to make an assessment about the likely state of the economy over the next couple of years.

"These questions are difficult to answer with any degree of precision. The inaccuracy of economic forecasts is well documented and often much maligned."

Among pending tweaks to its forecasting regime, Dr Debelle said the next quarterly Statement on Monetary Policy – the bank’s primary outlook document – will switch from its practice of publishing ranges for key forecasts, such as 2-3 per cent for inflation, to central forecasts to the nearest quarter point.

"Anything more precise than that is false precision, in my view."

Dr Debelle said the change was driven by improvements in forecasting technology, and "because we think that we can provide more useful information about the central forecast and the degree of uncertainty around the forecast."

Future statements will also include scenario analysis of potential risks, such as a 10 per cent fall in the exchange rate. In other words, the Reserve Bank’s analysts will detail how such a shock may impact on growth, jobs and inflation.