The RBA will focus more on underutilisation and wages as it aims to judge the impact of its cash rate.
Kearns noted the RBA felt constrained by politics to share its view on the labour market more bluntly, adding it will focus heavily on the underutilisation rate over unemployment, which could more accurately reflect how the market had changed since the pandemic.
“We have seen more of that adjustment occur in hours or in wages rather than necessarily in employment,” he added. “It's possible that they do get that adjustment this time around as well.”
The RBA last week adjusted its unemployment outlook within the latest Statement on Monetary Policy, following the Board's decision to hold the cash rate. (See MNI RBA WATCH: Hikes Discussed, Governor Defends Credibility) The Reserve now expects unemployment to print 20 basis points tighter in the June quarter at 4% then it predicted in the February SoMP, before peaking at 4.3% by the June 2025 quarter, down 10bp. The Reserve also expects the underutilisation rate at 5.3% in Q2, stronger than February's 5.8%, and peaking at 5.9% by Q4 2025 compared to the previous 6.2% by Q2 2025. (See charts)
Kearns noted the Reserve had chosen a slower approach to its inflation fight to protect the jobs market. “And because of that we're now in a situation where the unemployment rate hasn't increased as far as expected, " he added. "The RBA has downgraded its forecasts for the unemployment rate and yet it still hopes to stay on this path of not needing to rate raise rates further.”
TRICKY PATH
The RBA has not balanced the policy risks against the economic risks, Kearns said.
“There's definitely a skew in the policy environment, because if we were to see marginally lower inflation in the next couple of quarters, I don't think that would actually change policy,” he argued. “Whereas when you've got inflation that's already forecast to be outside of the range for over four years, any further increase in inflation would entail significant policy risk that would necessitate an increase in rates.”
Kearns said the RBA should have lifted the cash rate to 5% by the start of 2024. "It would probably be a bit disruptive to the RBA's credibility to increase it now because we've had one stronger inflation number but not a lot has otherwise changed in the RBA's outlook and narratives," he noted. "If it wants to be consistent in its interpretation of the economy, it will be pretty hard for it to increase without further evidence."