MNI: RBA Inflation Strategy to Protect Labour Gains

The Reserve Bank of Australia will take a longer time to pull inflation down to protect gains made in the labour market, but a “time limit” exists and policymakers will do what they can to ensure expectations do not become entrenched, according to Governor Philip Lowe.

Speaking at an RBA dinner in Perth, Lowe noted the central bank risked inflation becoming entrenched if it does not act fast enough. “Expectations will adjust and life will become more difficult,” he said. Today’s 25bp cash rate hike to 3.85% will help return inflation to target in a reasonable period, he added. “This is the best way of sustaining as many of the gains in employment as is possible,” Lowe commented.

“We don’t need to get inflation back to target straight away, but nor can we take too long. We are taking a bit more time than some other countries, on the basis that doing so can preserve some of the gains in the labour market. But there is a limit here,” he added.

The RBA shocked markets today, which had priced in a further pause (see: MNI RBA WATCH: RBA Shifts Hawkish, Targets Sticky Services). The increase followed a slightly lower CPI print, which showed some sectors had experienced stickier inflation (see: MNI BRIEF: Softer CPI Gives RBA Space For Additional Pause).

SERVICES & LABOUR

Following the decision, Lowe noted services inflation was particularly concerning. During the speech, he explained services inflation had proved worryingly persistent.

"It is possible that circumstances might be different here in Australia, but the experience abroad points to an upside risk, especially given the high degree of commonality across countries in inflation dynamics recently,” he said. "Looking overseas, we see worryingly persistent services price inflation. It is possible that circumstances might be different here in Australia, but the experience abroad points to an upside risk, especially given the high degree of commonality across countries in inflation dynamics recently."

Lowe noted the RBA wants to ensure inflation falls, while it protects employment. “It took a long time for Australia to get back to conventional estimates of full employment," he continued. "But, as a by-product of the pandemic and the policy responses, we got there. The unemployment rate is the lowest it has been in nearly 50 years.”

MNI previously reported the RBA was aiming for a mid-2025 return to target with the unemployment rate between 4-4.5%.