speech from recovery to expansion philip lowe [ * ] governor keynote address at the australian farm institute conference toowoomba – 17 june 2021 thank you for the invitation to join the australian farm institute's conference. it is a great pleasure for me to visit toowoomba and to learn more about the issues facing the farm sector and regional australia. as we all know, the past year has been an extremely challenging one in the life of our nation. but as a country we pulled together, and we have been up to the task. the results are evident in our health and economic outcomes, which are better than elsewhere in the world. it is important that we don't lose sight of this. this morning, i would like to talk about how the economy is now transitioning from recovery mode to expansion mode, and highlight some of the issues that this raises, including for regional australia. i will then conclude with some comments about the outlook for monetary policy. back in march last year, the national economic strategy quickly turned to building a bridge to the day when the virus was contained. the idea was to use this bridge to help people and businesses get across to the other side. the hope was that by doing this, we could avoid much of the costly damage that would be caused by mass unemployment and widespread business failures. this was the right strategy, and it was supported by governments across australia, the rba and australia's financial institutions. the results speak for themselves. today, the level of employment in australia is above its pre - pandemic level. australia and new zealand are the only advanced economies where this is the case ( graph 1 ). in the united states, employment is still nearly 5 per cent below the pre - pandemic level and in spain it is 3 per cent below. graph 1 change in employment since december 2019 % - 2 - 2 - 4 - 4 - 6 - 6 n ew ze a au lan n str d et he alia sw rla it nd so zer s ut lan h ko d u re ni f te r a d anc ki ng e do ja m g pa er n m a sw ny ed c en an ad sp a ai n u ni te ital y d st at es % sources : rba ; refinitiv the gdp data also paint a positive picture of the recovery, which has been v - shaped ( graph 2 ). the level of output in australia is now above its pre - pan

inflation rate to prevail for the economy in general. perhaps more importantly, few businesses appear to believe they have'pricing power ', and individual price changes against a low inflation backdrop are much more transparent than was the case under high inflation. witness, for example, the degree of scrutiny of price rises in the period after the introduction of the gst, or the attention routinely given to changes in petrol prices. much of this is due, of course, to the more competitive nature of markets and the activities of the competition authorities, but the low inflation environment is also an important factor. perhaps the group who devotes most effort to anticipating inflation trends is professional investors in the bond market. nominal bond rates are usually thought to embody an allowance for future inflation. the difference between the indexed bond yield – a real yield – and the conventional bond yield is a measure of the average rate of inflation anticipated over the life of the bond plus, probably, a premium for the variability of inflation. initially, markets were sceptical that we would keep inflation to the targeted rate. but after monetary policy passed the first test in the inflation - targeting period – tightening in 1994 ahead of a pick - up in inflation in 1995, which was successfully capped and reversed – this measure of inflation expectations came down to levels which were consistent with the inflation target. there have been ups and downs in this gauge of expectations, which broadly corresponded to the cycle in actual inflation. but on the whole, from 1996 through to 2003, these expectations have been fairly closely matched to the 2 to 3 per cent target. in general, i think we can say that while high inflation expectations have not been eradicated from every corner of the economy, generally speaking inflation expectations are low, consistent with the inflation target, and quite stable. that is no small benefit because it allows policy more flexibility than would otherwise be the case in assisting output in the face of shocks. has this performance on inflation been associated with any cost to growth? while we cannot know the counterfactual, i think everyone now acknowledges that australia's growth performance in the past decade has been exceptionally good. table 2 updates a table from an earlier evaluation of performance made by staff at the international monetary fund ( imf ) in 1998, which compared australia with other inflation - targeting countries and a group of non - inflation - targeting countries. r. brooks ( 1998 ),'inflation and monetary policy reform ', in australia : benefiting from economic reform, international monetary