MNI: RBA's Labour Focus To Keep Rates Lower - Ex Staffers

The Reserve Bank of Australia’s sharpened focus on the labour market will make it more tolerant of higher inflation and less likely to hike the cash rate so long as price rises remain close to the 2-3% target, former staffers told MNI.

Callam Pickering, APAC senior economist at employment website Indeed.com and former senior analyst at the RBA, said recent Reserve comments had made it clear it will tolerate inflation somewhat above the 2-3% target provided it helps maintain full employment, making hikes less attractive compared to the past.

“There's been a lot of conversation recently about whether inflation is coming down fast enough and, in a vacuum, I would say inflation isn't coming down fast enough,” he told MNI. “But when you consider the dual mandate, I think the RBA’s recent decisions and its unwillingness to hike again begins to make more sense.”

RBA Governor Michele Bullock and Federal Treasurer Jim Chalmers signed a new statement on the conduct of monetary policy late last year, which altered the employment mandate to “achieving sustained full employment, which is the current maximum level of employment that is consistent with low and stable inflation.” Newly-appointed Deputy Governor Andrew Hauser last week told the Australian Financial Review that the RBA is testing how low unemployment can sustainably be, and that justified the lower 4.35% cash rate compared to foreign peers.

Hauser’s comments represented the RBA’s first public admission that its focus had shifted following the updated agreement, noted Pickering. Inflation and labour could compete against each other as the Reserve aims for balance, he added.

“The RBA is going to have to make a choice between what it wants to prioritise at any one given point in time," he continued. "In the past, inflation was always the priority, but that’s no longer the case. Perhaps when it's really high or low, but when it's close enough to the target, the priority might shift to employment and that’s perhaps what we're seeing at the moment.”

The RBA held the cash rate steady at the most recent May meeting despite a string of stronger CPI reads. (See MNI RBA WATCH: Hikes Discussed, Governor Defends Credibility)

Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics and a former RBA economist, said the Reserve's focus on employment had crept in before the changed mandate. “The labour market has already been given a lot of weight in their policy settings – if you were purely concerned about inflation, rates would be much higher than they are now.”

LABOUR FOCUS QUESTIONED

But Mark Wooden, professorial fellow at the Melbourne Institute at the University of Melbourne and former Fair Work Commission Annual Wage Review panel member, said the RBA’s commitment to the employment part of its mandate was not so apparent, and that it should already have started talking about rate cuts if it placed greater emphasis on jobs.

"All indicators suggest inflation is weakening and the labour market is softening. The unemployment rate is now back over 4%, so goodbye full employment." He added monetary policy lagged, "if you think falling employment, rising unemployment rates might be a problem in six months, you have to act now."

Should CPI return to target, the RBA's updated remit could lead it to give employment higher priority, he conceded. "At least for a while. But the question is whether, given the lags, that is too late."

PATH AHEAD

Pickering argued the Reserve's focus on employment will likely stay its hand until early 2025. "If they get another few months of bad inflation reads then that could potentially be enough to force its hand into a further hike," he argued.

"The other big issue is productivity growth. There is a clear disconnect between that and wage growth at the moment, which doesn't necessarily stop inflation from getting back to the target in the near term, but could certainly have a big impact on the ability of the RBA to maintain that inflation target." (See MNI POLICY: RBA Relief As Productivity Weakness Unwinds)

Langcake doubted the RBA would hike again, especially if the labour market cools over the year.