Luci Ellis says RBA committed to low rates post-Covid with full employment a priority

RBA assistant governor Luci Ellis has underlined the bank’s commitment to maintaining ‘highly supportive monetary conditions’.

RBA assistant governor (economic) Luci Ellis. Picture: Aaron Francis

Reserve Bank assistant governor Luci Ellis has underlined the bank’s commitment to maintaining “highly supportive monetary conditions” well beyond the ­immediate post-Covid economic rebound, saying full employment is “an important national priority”, even as more private sector economists predicted the central bank will lift rates sooner than it has ­indicated.

Speaking at an Ai Group event in Adelaide on Wednesday, Dr Ellis recognised Australia’s “swift bounce back”, 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,” said Dr Ellis, who leads the RBA’s economics group.

“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.”

Her comments came as Commonwealth Bank predicted on Wednesday that the RBA would start lifting rates late next year and Capital Economics said rate rises would start in early 2023. Westpac and ANZ recently predicted rises from late 2023.

CBA’s head of Australian economics, Gareth Aird, said he expected the central bank to deliver two consecutive rate increases, in November and December of next year, taking the cash rate from 0.1 per cent to 0.5 per cent. Rates would then rise to 1.25 per cent by September 2023, he said.

“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,” Mr Aird said.

His comments came after CBA increased its “floor rate” for ­assessing the borrowing capacity of new home loan customers to 5.25 per cent, from 5.1 per cent, on Friday.

In her speech, Dr Ellis said that shooting for full employment – which the RBA judges at 4 per cent unemployment, and Treasury at 4.5 per cent – was “a worthy goal for its own sake”, but that it was also a “precondition for achieving the rates of wages growth that would be consistent with inflation being sustainably within the 2–3 per cent target range that the bank is mandated to achieve”.

Moreover, supporting demand through easy monetary policy would also “help enable any structural adjustments that might be needed” in the wake of a pandemic that had left permanent impressions on how people lived.

“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,” Dr Ellis added.

Dr Ellis was speaking ahead of a key RBA board meeting on July 6, in which governor Philip Lowe will outline the next phase – and potential phasing down – of the central bank’s extraordinary bond-buying ­policies.

Dr Lowe has recognised the faster-paced economic recovery, but steadfastly maintained that a tightening labour market would not trigger the type of wage growth that would mean rate increases before “2024 at the earliest” – most recently in a speech last week.

His dovish stance relative to a majority of US Federal Reserve officials – who predicted that US rate rises would start in 2023 – contributed to the dollar’s fall to a six-month low of US74.78c last week. The currency was buying around US75.63c late on Wednesday.

However, the blockbuster labour force statistics for May showed a sharp drop in the unemployment rate, from 5.5 per cent to 5.1 per cent, leading private sector economists and investors to expect rate increases to start sooner than 2024.

The pace of the economic recovery has left employers scrambling to hire workers – either to replace workers laid off during the recession, or to boost staff numbers to meet a sharp rise in demand.

Westpac chief economist Bill Evans last week said he expected unemployment would reach 4 per cent – or the RBA’s assessment of full employment – by late next year, and that inflation would be above 2 per cent by then and so “no longer requiring the Covid emergency rate settings”.

That would trigger rate increases in 2023, Mr Evans said.

ANZ was the first of the major banks to bring forward the forecast timing for the first rate rise to the second half of 2023, with economists there now seeing a bigger chance of an earlier move.

Businesses advertised for 245,000 jobs in May, or nearly 50 per cent above pre-pandemic levels and the highest number since the global financial crisis, according to the National Skills Commission internet vacancies index.

Even as demand for workers has boomed, the closed international border has constricted the number of available foreign workers, causing labour short­ages in industries such as hospitality.

But CBA’s Mr Aird said his forecasts were dependent on ongoing, substantial fiscal support.

“We believe that the RBA cannot achieve their objectives of full employment and inflation ‘sustainably in the target’ without the assistance of the commonwealth government,” he said.

“More specifically, fiscal settings need to remain stimulatory and net overseas immigration cannot catapult back to strong pre-Covid levels if wages growth is to remain at 3 per cent per annum or above.”

Under the central bank’s “upside” economic scenario, the jobless measure would drop to 4.5 per cent by the end of this year – versus a 5 per cent “baseline” estimate – and to 4 per cent by December 2022. Even this most optimistic scenario only added 0.25 percentage points to underlying inflation – pushing it to 2 per cent by the end of next year, against the most likely estimate of 1.75 per cent.

The RBA’s official guidance is that rate increases are unlikely before “2024 at the earliest”.

However, RBA deputy governor Guy Debelle said last month it was “the state of the economy that is the key determinant of policy settings, not the calendar”.

Dr Lowe last week said rate increases were “still some way off”.

The RBA will release its updated set of forecasts in August.