Daily Commentary BY THE CURVE TEAM –

Daily Insights – A Flat Phillips Curve

Friday, 26th November, 2021

Quiet Market

  • Markets were relatively quiet overnight, with the U.S celebrating Thanksgiving.
  • ECB Meeting minutes highlight that inflation is expected to rise further near-term.
  • Retail Sales are out today and expected to show increased spending as the country moves away from lockdown restrictions.
  • A strong U.S Dollar remains a driving force globally.

The Phillips Curve – RBA’s Central Scenario

The Phillips Curve (pictured) maps inflation against unemployment. Central bank stances around the world differ on the importance of The Phillips Curve, but it is integral to the RBA’s central scenario and therefore an important metric for the Australian outlook.

Recently, Governor Lowe has described The Phillips Curve as being flat. A flat curve implies that quite large changes in the unemployment rate are needed to generate a sustained change in the inflation rate. Hence Lowe’s argument that the change in interest rates priced by the market and the impact this might have on unemployment and then inflation would be relatively small over a 12–18-month horizon (this being the time difference between the start of meaningful market pricing of rate hikes and the end of the RBA’s forecasts).

What is significant with this view, is that a flat Phillips curve means it may take quite a bit of tightening and/or large initial moves to have much impact on inflationary outcomes.

Nicholas Allan

Associate - Money Markets