guy debelle : global influences on domestic monetary policy address by mr guy debelle, deputy governor of the reserve bank of australia, to the committee for economic development of australia ( ceda ) mid - year economic update, adelaide, 21 july 2017. * * * thanks to dan rees and rachael mccririck for their work on the neutral rate, which this draws directly on. there are a large number of factors that the reserve bank board takes into consideration in making its interest rate decision each month, both domestic and global. today i would like to talk about some of the global influences on domestic monetary policy. as you are well aware, the australian economy doesn ’ t operate in isolation from the rest of the world. this is also true when it comes to monetary policy. while the goals of monetary policy are very much domestic, in terms of inflation and employment, the influences on the achievement of these goals are both domestic and global. in talking about the global influences on the setting of monetary policy, i will make the probably obvious point that the policy rate here in australia is at a historic low, in no small part because policy rates elsewhere in the world are also around historic lows. why are global policy rates as low as they are? part of the explanation is that to meet their policy goals, central banks in other advanced economies have had expansionary policy settings since the start of the global financial crisis. moreover, in the largest advanced economies, policymakers have provided further monetary stimulus through large asset purchase programs, which have seen central bank balance sheets increase significantly. another part of the explanation is that the neutral level of the policy rate has declined in most countries, including here in australia. that is, the level of the policy rate where monetary policy is neither providing stimulus nor restraint is lower than it used to be. central banks have had to set their policy rates even lower than that already lower neutral policy rate to provide the appropriate stimulus to their economies. i will start by talking about four common global factors that have led to the expansionary monetary policy settings seen in most advanced economies for almost a decade. these four factors are present in australia to varying degrees. i will then discuss the neutral policy rate and its decline over the past decade. i will finish with some comments on the influence of global financial factors on domestic monetary policy considerations. four common global factors the first and most obvious factor influencing monetary policy settings globally is the financial crisis and its aftermath. the large and rapid decline in policy rate

we must get closer to 2 / 11 bis central bankers'speeches the point where wage pressures materialise. wage growth in australia is subdued, as it is elsewhere. one noteworthy difference in australia is that labour productivity growth has generally been higher than it has been in other countries over recent years. as a result, there has been no growth in unit labour costs ( that is, wages adjusted for productivity ) in australia for five years, whereas in other countries, unit labour cost growth has been quite a bit higher. the fourth and last common factor is the sustained low inflation that has been evident globally for the past decade ( graph 2 ). this is a direct consequence of the three previous factors i have just talked about. in addition to those influences, there has been a continuation of the disinflationary pressure resulting from the integration of china into the global economy. there are signs that this latter force might be waning, with producer prices in china actually growing, following many years of continual, often quite substantial, declines. throughout the past decade, expectations about future inflation have remained broadly anchored, which, at times, has helped stave off a shift towards deflation, but currently may be dampening the prospects of a sustained pick - up in global inflation. 3 / 11 bis central bankers'speeches these four factors – the subdued global recovery, low investment, subdued wages growth despite low unemployment rates and low inflation – are the primary explanation for the very stimulatory policy settings in place globally ( graph 3 ). the fact that they are at such low levels has a material influence on why the policy interest rate in australia is also at a historically low level. 4 / 11 bis central bankers'speeches beyond these factors that i have just discussed, another significant factor contributing to the low level of policy rates globally is that the neutral policy rate in many countries has declined over the past decade. the neutral interest rate the neutral interest rate provides a benchmark for assessing the current stance of monetary policy. if the real policy rate – that is, the cash rate less inflation expectations – is below the neutral rate, then monetary policy is exerting an expansionary influence on the economy. if the real policy rate is above the neutral rate, then monetary policy is exerting a contractionary influence on the economy. the neutral rate is often associated with the turn of the 20th century swedish economist knut wicksell and was picked up by keynes. 4 the previous governor glenn stevens discussed the neutral rate