Interest rates are being kept stable to protect employment, RBA governor says
Reserve Bank Governor Michele Bullock says other countries may be cutting interest rates, and have lower inflation than Australia, but many are also grappling with high and rising unemployment now.
She said the RBA has been trying to preserve as many of the jobs as possible that were created in Australia’s extraordinary pandemic economy, and that’s partly why Australia looks a little different to its peer economies at the moment.
In a speech to the Committee for Economic Development of Australia’s (CEDA) annual dinner in Sydney on Thursday, Ms Bullock said the RBA’s strategy still seemed to be working.
But she also understood why some people may be wondering what was going on.
“Recently, I have been asked why other central banks are lowering interest rates and the RBA is not,” Ms Bullock said.
“To explain this, I need to describe what the board is trying to achieve and ways in which we seem to be a little different from some other peer economies.
“All central banks care about inflation and the potential impact of their policies on the economy and the labour market.
“But there have been some important differences reflecting the different weights that central banks place on the two objectives.”
Ms Bullock’s speech comes a day after New Zealand’s central bank cut rates for the third time in four months and flagged further rate cuts ahead.
New Zealand’s official cash rate was reduced from 4.75 to 4.25 per cent on Wednesday, down from a peak of 5.5 per cent in July, with RBNZ officials acknowledging that many New Zealanders were currently leaving their recession-hit economy to live and work in Australia.
Earlier this month, Treasury Secretary Steven Kennedy said Australia’s net overseas migration was running at higher levels than Treasury officials had forecast for this point in Australia’s economic cycle, partly because of the unexpectedly-high number of New Zealanders moving here.
Australia’s labour markets are tighter than peer economies
In her speech on Thursday evening, Ms Bullock said the RBA Board had kept Australia’s cash rate target sitting at 4.35 per cent for a little over a year now.
She said the board felt interest rates were “restrictive” at this level.
She said you could see evidence of that restrictiveness by looking at Australia’s household sector, which currently had “very weak growth in consumption, a decline in per capita consumption, and very low dwelling investment.”
However, she said interest rates in Australia clearly hadn’t reached the same levels of restrictiveness as many other countries, and that had coincided with inflation in Australia being “somewhat higher,” relative to the RBA’s inflation target, than in most of those economies. See the graph below (from her speech).
But she said Australia’s labour markets also appeared “unusually tight” compared to peer economies now.
In fact, she said conditions in labour markets in peer economies had “eased significantly” and unemployment had increased to the point where their labour markets were now considered to be close to balance or have “spare capacity.”
“Spare capacity” is a euphemism economists use to describe a situation in which there are many more unemployed people than jobs available, or where many workers can’t get the hours they want, or both.
When it comes to the prospect of interest rate cuts, Ms Bullock said some peer central banks had been slowly reducing rates as they’ve become more confident that inflation is moving back towards their targets, but so far most have of them have stated that they’re only removing some restrictiveness [her italics].
“That is, central banks globally are still pushing against high inflation despite pulling back on the extent of restrictiveness somewhat,” she said.
“With their inflation rates now close to target and the easing they have seen in their labour market conditions, they are turning their attention to downside risks in their economies and labour markets,” she said.
New Zealand’s central bank is currently dealing with such “downside risks” as it attempts to revive the country’s economic activity.
“Unemployment is expected to continue rising in the near term since the labour market typically takes longer to recover than output,” RBNZ officials warned on Wednesday.
Ms Bullock said looking ahead for Australia, RBA staff were still expecting inflation to return sustainably to the midpoint of the Bank’s 2-3 per cent target range by late 2026, as restrictive financial conditions gradually brought the economy and labour market into better balance.
“The board’s strategy over recent years has been to set monetary policy in a way that returns inflation sustainably to target in a reasonable time-frame, alongside a gradual easing in labour market conditions to levels consistent with sustainable full employment,” she said.
“The goal underpinning this strategy has been to preserve as many of the jobs that have been created over recent years as we can. This is what we have previously referred to as the ‘narrow path’.
“We still think we are on the narrow path,” she said.
Australia’s national unemployment rate is currently 4.1 per cent. It has been hovering within a range of 3.8 to 4.2 per cent for the last 12 months.
In the year before COVID-19 hit Australia in 2020, the unemployment rate was hovering within a range of 5 to 5.3 per cent.
