MNI: RBA Needs To Cut NAIRU Estimate - Ex-Staffers

The Reserve Bank of Australia should lower its estimate of the unemployment rate compatible with stable inflation as the post-Covid labour market runs hot, former RBA economists told MNI.

The RBA’s Non-Accelerating Inflation Rate of Unemployment (NAIRU) estimate remains unchanged from its pre-Covid 4.5%, despite a downward trajectory leading into the pandemic (see chart below), according to Blair Chapman, director at Deloitte Access Economics and a former RBA research economist and lead analyst.

NAIRU likely tracked lower as the economy heated up post-Covid and the RBA should update it, Chapman added. “But they also must consider broader thinking about the drivers of the long-term sustainable rate of unemployment, which suggest that drivers such as female participation and the lack of business dynamism have been pulling down the NAIRU for some time,” he noted.

A Treasury working paper published in 2021 put pre-Covid NAIRU between 5-4.5% and RBA Governor Philip Lowe noted during a Q&A earlier this month the level "was below 5%," but stressed productivity growth was the more pressing issue. Australian unemployment has printed at 3.5% over the last two quarters.

“To get inflation back within the RBA’s target band, it is likely that unemployment will increase but does the RBA want to just get back to the NAIRU or do they want to shoot through it to really slow the economy? The Bank has stated its NAIRU models aren’t working, but having a reliable estimate of the NAIRU is important for their decision making."

Lowe stressed last week the Reserve would seek to protect employment gains as it fights inflation (see: MNI: RBA Inflation Strategy to Protect Labour Gains), following its shock 25bp hike to 3.85%. (see: MNI RBA WATCH: Shifts Hawkish, Targets Services) The Reserve believes unemployment will remain low for the next two years, while it debates internally how to curtail high rental costs.

STRONG DEMAND

Callam Pickering, APAC senior economist at employment website Indeed.com and former senior RBA analyst, noted demand for workers remains incredibly strong. “On Indeed, there are still about twice as many job ads as there were before the pandemic began,” he explained. “It is very hard to imagine the unemployment rate spiking higher when there are just so many jobs out there for anyone who wants one. If you lose your job in the current environment, you will feel optimistic about reemployment.”

While the number of job ads declined from January, they fell from a high peak, Pickering said. “There are still widespread skill shortages, which suggests the labour market will remain reasonably strong in the near term.” Private sector wage gains will likely hit 4% over the next six months from about 3.2%.

However, Chapman warned faster-than expected immigration could put downward pressure on wages. “Skilled professionals from Asia and Europe will add pressure to those wages negotiated via individual agreements,” he said. Australia’s wider collective bargaining-focused employment market meant wage increases also filtered slowly through the economy, he explained.

NEXT MEETING

Pickering saw a roughly 50% chance of a hike at the June 6 board meeting. “I wouldn't be surprised if they moved to a hike-pause scenario,” he added. “I'd probably lean towards a pause at this stage with a possible rate hike for July being the most likely scenario at the moment.”

Overnight index swaps imply a pause in June, with a slight chance of an increase in July, which is priced at 3.9% versus the current 3.85%.

Chapman added the RBA may look at rates again in August following the next quarterly CPI read. “The quarterly data has extra detail on underlying inflation, which is what the RBA will be looking at when they update their forecasts,” he explained.

Both agreed the recent Federal budget, with an extra AUD14.6 billion earmarked for cost-of-living concessions, would be inflationary and could require RBA action. “All that money saved will be spent somewhere else – [the Government] will push up demand for goods and services elsewhere, which will likely lead to concentrated price pressures in other areas of the economy,” Pickering argued.