RBA Ellis: Remains committed to maintain highly supporting monetary conditions

• Published on
• 23 Jun 2021, 02:06 PM

--Board remains committed to maintaining highly supporting monetary conditions
--Aim to support return to full employment, inflation consistent with target
--Need to support demand for as long as spare capacity remains
--Output, employment recovered far sharper than most dared to imagine year ago
--Big question is whether recovery simply snap-back to prior activity or make-up from lost growth
-- JobKeeper program clearly supported the recovery in the labour market
--Effect of bottlenecks on prices should dissipate
--Household, Business balance sheet stronger vs pre-pandemic; exceptional, welcome outcome

By Sophia Rodrigues

(Sydney, June 23, 2021)—The Reserve Bank of Australia remains committed to maintaining highly supporting monetary conditions to support a return to full employment and inflation consistent with the target, Assistant Governor Luci Ellis said Wednesday.

Ellis was speaking at the AI Group Business Lunch in Adelaide on the topic, “Lessons and lasting effects of the pandemic.”

Ellis reminded that the pandemic is not over and while Australia has seen a swift bounce-back, the focus is to now sustain the expansion phase. This means ensuring that demand continues to be supported for as long as spare capacity remains.

Supporting demand would help achieve full employment and to help enable any structural adjustments that might be needed in a post-pandemic world, Ellis said.

The latter is far easier to do when demand is robust, and the former is important to achieve rates of wages growth that would be consistent with achieving 2% to 3% inflation target on a sustainable basis.

“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,” Ellis said.

“Full employment is a worthy goal for its own sake, given how important jobs and income are for people’s welfare. It is 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,” Ellis added.

In the speech, Ellis talked about how Australia’s recovery exceeded all expectations even before the rollout of vaccines due to relatively good health outcomes, and fiscal and monetary support.

The recovery in output and employment was “far sharper than most of us would have dared to imagine a year ago,” Ellis said, adding, “This is very different from the pattern of past downturns.”

The question for the outlook is whether the recovery is simply a snap-back to prior patterns of activity, or whether there is some make-up from the lost growth.

“The answer is shaping up to be that it depends on which category of spending we are talking about,” Ellis said, in a suggestion that it is a mix of both.

Ellis said that Australia’s recovery was largely supported by the income provided by the JobKeeper program, and as result both the household sector and the business sector are entering the expansion phase with stronger balance sheets that they had before the pandemic.

“This is an exceptional, and welcome, outcome,” Ellis said.

On other topics, Ellis said that it is reasonable to expect that disruptions caused by pandemic will ease over time, as bottlenecks are dealt with and health-related constraints on production ease.

 “Some key producers also plan to expand capacity, for example in semiconductors and ships. So, the effects on prices should also dissipate.”

One area where Ellis appeared to raise some concern is commercial space. She noted that vacancy rates for both office and retail property have jumped up since the pandemic began.

“Occupancy of the space that is still leased is also below pre[1]pandemic norms. What this means for the longer term has been a constant discussion, both in our liaison program and globally,” Ellis said.

“The general theme that comes out of these discussions is one of uncertainty; while the direction is towards reduced demand for office space, it’s too soon to decide how far to cut down on space.”

--Contact: Sophia@centralbankintel.com