MNI: Updated RBA Goals To Push Hawkish Stance - Ex Officials

The Reserve Bank of Australia’s updated agreement with the federal treasurer will put upward pressure on the cash rate over time, as the Bank’s inflation target shifts lower and it applies a more narrow definition of full employment, former officials told MNI.

Peter Tulip, chief economist at the Centre for Independent Studies and a former senior research manager at the RBA, said the wording of the updated Statement on the Conduct of Monetary Policy – the key document which dictates the bank’s goals – implied the Reserve would need to adopt a more hawkish stance. “The wording seems deliberately obscure because the message is an unpopular one and I don’t think the government wants the responsibility,” Tulip noted.

The statement released Dec 8 calls on the RBA to set “monetary policy such that inflation is expected to return to the midpoint of the target.” It also narrows the concept of full employment to "the current maximum level of employment that is consistent with low and stable inflation," and adds language on the timeframe in which inflation should return to target.

Tulip noted The RBA will need to clarify how it expects inflation to reach 2.5% – the mid-point of its 2-3% target band – which may involve rejigging its forecast presentations. The RBA’s most recent Statement on Monetary Policy released in November shows CPI returning to 3% by December 2025.

The RBA may need to extend its forecasts by one to two years from the current three-year horizon to show when it believes inflation will reach 2.5%, Tulip added. “This shouldn’t lead to a revision of the numbers, but it does call for more detail,” he said. Inflation has fallen and should continue to do so as the pandemic’s supply shock unwinds, but more sticky services inflation and higher wages would make the next phase more challenging, particularly with the record low unemployment rate, he added.

“The point of extending the forecast is not because decisions will hinge on the numbers, it’s to force the bank to tell a coherent story about what's going on, which they have avoided doing because of the short horizon.”

The Reserve was previously tasked with targeting the average of the 2-3% band over the cycle, which former Governor Philip Lowe achieved during his tenure. The cash rate has increased 425bp since March 2022, while the overnight index swaps market expects cuts to start mid-year.

TARGETING THE NAIRU

Tulip noted the statement’s focus on maximum sustainable employment implied the RBA would also need to target the non-accelerating inflation rate of unemployment (NAIRU) when setting monetary policy.

MNI reported in 2023 that the RBA's 4.5% NAIRU estimate had not changed since 2019 despite its pre-Covid downward trajectory. (See MNI: RBA Needs To Cut NAIRU Estimate - Ex-Staffers) The government's 2024 employment whitepaper has likely pushed the RBA to refresh its model. (See MNI: RBA To Look At Underutilisation In NAIRU Revamp)

Tulip said targeting 4.5% unemployment would also add tightening pressure. The unemployment rate printed at 3.9% in November, while the RBA expects it to rise and then hold at 4.25% by December.

Tim Robinson, senior research fellow at the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne and former RBA economist, said the statement will force the RBA to be more transparent with its NAIRU estimate.

“This increased prominence for full employment may be challenging for the RBA this year," he added, noting the labour market's resilience in 2023 had surprised. "But job ads have declined, so the labour market softening will probably occur as inflation continues to moderate," he added. "Of course the most recent RBA forecasts already have this, but they will have to explain it and any deviations of outcomes from the forecasts in this revised framework.”

Robinson noted the statement's adjustment to the timeline to return inflation to target was poorly defined.

The RBA next meets between Feb 5-6.