RBA economics boss stresses commitment to low rates

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    Reserve Bank assistant governor Luci Ellis has stressed the central bank’s commitment to maintaining “highly supportive monetary conditions” even beyond the current post-COVID economic rebound, even as market watchers continue to predict that rates will rise sooner than the RBA has indicated.

    Speaking at an Ai Group event in Adelaide on Wednesday, Ellis – who leads the central bank’s economics group – said that full employment is “an important national priority.” She acknowledged Australia’s “swift bounce back” from the COVID-19 crisis, but said “the pandemic is not over.”

    “During the height of the pandemic, when restrictions on activity are tight, the task for policy is to build a bridge to the recovery,” Ellis said. “As economies move through recovery to the expansion phase, the focus naturally turns to sustaining that expansion. That means ensuring that demand continues to be supported for as long as spare capacity remains. Absorbing spare capacity and achieving full employment is an important national priority.”

    Ellis’s comments came the same day that Commonwealth Bank predicted the RBA would start hiking rates late next year and Capital Economics forecast a rate rise in early 2023. Westpac and ANZ recently predicted rate hikes starting in late 2023, according to a report by The Australian. The RBA has said repeatedly that it does not plan to raise rates until 2024 at the earliest.

    However, Gareth Aird, CBA’s head of Australian economics, told The Australian that he expects the RBA to deliver two rate hikes in a row, in November and December of next year – raising the cash rate from 0.1% to 0.5%. Aird said he expected rates to be at 1.25% by September 2023.

    “The forward-looking indicators of labour demand are very strong, yet labour supply is constrained, which means the labour market will continue to tighten very quickly and wages growth will accelerate,” Aird said.

    Read more: Brace for a rate rise – and soon – says CBA

    Ellis said in her speech that aiming for full employment – which the RBA defines as 4% unemployment, and the Treasury 4.5% – was “a worthy goal for its own sake,” but that it was also a “precondition for achieving the rates of growth that would be consistent with inflation being sustainably within the 2-3% target range that the bank is mandated to achieve.”

    Ellis said that supporting demand through easing monetary policy would also “help enable any structural adjustments that might be needed” in the wake of a world-changing pandemic.

    “It is far easier for a firm to change business models when demand is robust, and far easier for a worker to switch industries or careers when there are plenty of jobs available,” she said. “To the extent that the post-pandemic world is indeed different from the pre-pandemic one, a robust recovery and expansion can smooth the transition. For all these reasons, the board remains committed to maintaining highly supportive monetary conditions.”

    RBA Governor Philip Lowe has acknowledged that the Australian economy is rapidly bouncing back from the pandemic, but has been steadfast in his insistence that a tightening labour market wouldn’t spur the kind of wage growth that would lead to rate increases until “2024 at the earliest” – most recently in a speech last week, according to The Australian.

    However, labour statistics for May revealed a steep decline in the unemployment rate – from 5.5% to 5.1% – leading market watchers to expect a cash-rate hike sooner.

    Last week, Westpac chief economist Bill Evans predicted that unemployment would reach 4% by late next year, and that inflation would be above 2%, “no longer requiring the COVID emergency rate settings.”

    Evans predicted that rate increases would come in 2023, The Australian reported.

    Ryan SmithRyan Smith is currently an executive editor at Key Media, where he started as a journalist in 2013. He has since he worked his way up to managing editor and is now an executive editor. He edits content for several B2B publications across the U.S., Canada, Australia, and New Zealand. He also writes feature content for trade publications for the insurance and mortgage industries.
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    Original Article