MNI POLICY: RBA Believes Unemployment Likely Below NAIRU

The Reserve Bank of Australia believes the tight labour market and strong wage growth shows unemployment remains below the level compatible with stable inflation, despite calls for it to recalibrate its views of joblessness, MNI understands.

Economists recently called on the RBA to cut its Non-Accelerating Inflation Rate of Unemployment (NAIRU) estimate, which remains unchanged from its pre-Covid 4.5%, despite a downward trajectory leading into the pandemic (See MNI: RBA Needs To Cut NAIRU Estimate - Ex-Staffers).

The RBA, however, believes the unemployment rate is clearly below the Philips Curve equilibrium. The Reserve has employed a unique approach that takes account of the large supply shocks over the past few years, which have had an outsized impact on inflation, which is in turn a lead indicator for determining NAIRU in standard models. The RBA is using its judgement to gauge wages and employment beyond the upward movement of prices, MNI understands.

The seasonally-adjusted wage price index rose 0.8% over the March quarter and 3.7% over the year, up from 3.6% recorded over Q4 2022 and beating expectations for a 3.6% rise, according to Australian Bureau of Statistics data released today. (See MNI BRIEF: Aussie Wages Stronger at 3.7% Y/Y)

MNI understands that the RBA does not want to place too high an emphasis on NAIRU as it is an “invisible” factor and wants to focus on more tangible data points, such as wages, CPI, growth and unemployment when discussing monetary policy.