Transcript of Question & Answer Session The Outlook for Inflation and Employment

We really appreciate all the changes that the RBA has made regarding the (inaudible); I think it was really well received by the market. My question is on the productivity assumptions. Just given your observations about the volatility and the uncertainty of quarterly estimates, how will you know whether you’re tracking in the right direction relative to those assumptions; and, if you’re not tracking relative to those assumptions, what policy implications are there?

Well, as I said, it’s probably not a quarterly blow-by-blow job. You kind of look at it over a number of years whether you were tracking along it. I think we all do that; we all need to assess it. We have actually seen things turn around already. We think quite a bit of that turnaround will just come from the pandemic effects fading away but also from the state of the labour market that we’re projecting. If it were not to go there, well, there’s different ways it can work out. If you want to contain inflation, you could have wage growth going lower, that is one way to do it. You can see that that’s the constellation that we have, which is the productivity and the average earnings paid kind of add up to the unit labour cost, and that is a key input into inflation. There are also other elements that are actually in the price-setting process of firms. So it’s just one that we will need to see how it works out. But at the moment, that’s kind of the constellation that is underpinning our forecasts.

Thank you, Marion. I want to ask about seasonal adjustment, which is something that no one’s had to think about for decades. But it’s pretty clear, certainly in the most recent retail trade numbers, that the statisticians are having all sorts of trouble adjusting to the changed behaviour, and we know that (inaudible). Potentially, that’s also getting to the employment labour market analysis. What is your view here? Is the RBA trying to come up with a better way of reading these monthly numbers? Do we just completely dismiss these numbers? What’s the path forward?

The experts on seasonal adjustment is the ABS. It’s a whole, big group; that’s what they do. It would be presumptuous to think that you can do a better job just on the seasonal adjustment. But what you typically do is, if you think there is some extra volatility, is just move through, right? You look at three months, you look at the quarterly numbers and, of course, if you do that for both employment and for the latest retail trade data, what you see is that the figures don’t look quite as extreme. December’s are very low but actually, November was very high. We know that people kind of moved their shopping from December into Black Friday but then, overlaying, we’ve had a couple of years of pandemic. So I think, to some extent, we need to give ourselves a bit of time for the seasonal adjustment factors to settle to get a cleaner read and, during that time, I think we just need to be careful not to overemphasise a single monthly number. Thanks.

Hi. Thank you for your speech, Marion. I just have a question about the addition of the hours-based underutilisation rate and the forecast there. I’m just interested in how you’re using that in a broader sense with forecasts and sort of how you’re thinking about it and how the Board its potentially thinking about it, when they meet each six weeks.

We’ve been looking at these measures for some time – these are not new; maybe we’re publishing them now – and that really comes from a structural factor going on for a couple of years, and it was mentioned earlier, right? Part-time … we have a long-term trend in part-time increase. So a heads-based measure is going to give you ‘you work/you don’t work’, but it’s not picking up the subtlety of a changing labour force where, actually, the margin of adjustment is actually how many hours you work, particularly as the share of part-time employees increases. And, of course, we’ve had this data available for a long time. The ABS asks people ‘would you like to work more hours?’ and that’s actually true for full-time as well. Right? There’s a bit of an arbitrary division on whether you’re full-time or a part-timer. So we’ve been using these numbers internally for quite some time to build up a richer picture around just who wants to work more hours but can’t get them. And, in that sense, we’ve moved our measures probably more into an hours-based perspective but I think that there are benefits in looking at all of those measures. The advantage that the unemployment raises is it’s got a really, really long history and that kind of gives you historical episodes to base off on. So I wouldn’t throw one or the other away, but it’s certainly a big one. And we’ve looked into this analytically – I think we might have published that work, actually, a few years back. Recent recessions, particularly shallower recessions, hours worked was a much bigger margin of adjustment than the headcount of employed and unemployed compared to a couple of decades ago. And so, again, that’s informing our forecasts – that we think, actually, the hours worked are going to be a sizeable margin of adjustment.

The Reserve Bank Review has spoken and you (inaudible) this morning by accepting these recommendations around increased transparency and better communication. One aspect of that you mentioned today is that you are now publishing the assumptions underlying your forecasts, and the Reserve Bank’s forecasts are based on rate cuts every year. On the weekend, the home auction clearance rate hit 76 per cent, which I think is the highest in about two years since you started hiking rates. I wonder if it’s possible that the Reserve Bank operating on the assumption of rate cuts and promoting that into the community is actually quite unhealthy or counterproductive for your inflation goal.

So can I just take two things separately? I’m not going to comment on the short-term movements in the housing market and what’s been driving those. We know it’s a complex issue; there’s more than one. But the issue of the cash rate assumption forecast – this is a technical assumption and we’ve been very clear about this repeatedly. We need to have a technical assumption in the forecasts. What we do is basically market expectations in a broad sense – we do an average between market economists and market expectations. We’ve been doing this for a very long time and we’ve actually been talking about what the cash rate assumption is for a very long time, if you go back, we’ve just not added it to the table, but people said, ‘well, we want to know what’s in there’. But this is not a prediction of what we are going to do, this is not a promise of what we’re going to do, and we’ve been very clear about that every time we’ve been asked; it’s everywhere written in there. And I think the Governor has been very clear about what the future path for cash rate is and isn’t. We do need to put something into the forecasts, but they have a very wide error band around that. So I would like if you can help us getting the message out there of what the technical assumption is and isn’t, that will be helpful.

Marion, there’s a lot of focus on real household disposable income squeeze and (inaudible) factors for six or seven quarters. Is it your sense that the maximum pain to households, we’re getting close to it? If you think about inflation coming down, interest rates may have peaked and tax cuts coming in in the second half of the year. And when you think about consumption, do you think we’re getting pretty close to maximum pain for households?

That’s not how I would phrase it, just because the household sector is broad. We know this is an average; there’s a dispersion around it. As you can see in the graph – if you eyeball it, and you can take a ruler out – I think, in the next couple of quarters, probably around about mid-year, we’re expecting these headwinds to fade. And, again, the biggest headwinds for households in aggregate are actually inflation and tax payable; some of that is linked to inflation and the bracket creep. And the interest rate impact is actually on the household sector overall not the biggest, but there are those people with mortgages where it is sizeable, and there are those people without mortgages where it’s kind of not sizeable, so it’s with the savings where it’s actually a positive. So that’s kind of why I just want to qualify a little bit the pain and see the households not as that one unit that is in there; but, yes. So, on aggregate, we’re at the moment expecting for the growth rate to kind of turn positive again around about midyear.