A thorough reading of the Reserve Bank’s November statement on monetary policy should distress anyone concerned about needlessly throwing vulnerable Australians out of work. The Board is committed to increasing the unemployment rate to 4½ per cent from its present 4.1 per cent for no useful purpose.
The statement on monetary policy confirms no interest-rate relief in the foreseeable future and, by explicitly ruling nothing in or out, it signals an outside chance of an increase in the cash rate as demanded by the Recessionistas.
By stating in the Board’s minutes that “members would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable”, Board members have signalled they are in no hurry to reduce the cash rate.
Astonishingly, the Reserve Bank defines full employment as an unemployment rate of 4½ per cent. Its statement says: “… the labour market is expected to continue to ease gradually to be around full employment by late 2025” and its forecast unemployment rate for late 2025 is 4½ per cent.
That’s 680,000 Australians looking for work but unable to find it.
The Reserve Bank considers that at the present unemployment rate of 4.1 per cent “the economy still exceeds supply and that the labour market remains tight.”
In a speech on Thursday, the Governor doubled down, stating that the Reserve Bank judges “that conditions in the labour market remain tighter than what would be consistent with low and stable inflation” and that underlying inflation is still too high to be considering lowering the cash rate in the near term.
Here we go again. Despite stating in its October 2023 minutes that “there were few signs of the risk of a price-wage spiral materialising” and the Australian Bureau of Statistics reporting that the most recent result for the wage price index was the lowest annual rise since December quarter 2022 the Reserve Bank remains concerned about the possibility a price-wage spiral emerging. It wants to use monetary policy now to prevent a price-wage spiral whenever it might occur, sometime, somehow in the future.
Full employment, as defined by the Reserve Bank, is the Non-accelerating Inflation Rate of Unemployment (NAIRU). Some years ago, the Reserve Bank estimated the NAIRU at around 5 per cent. Ahead of the appointment of the present Governor, the Reserve Bank validated estimates of the NAIRU at 4½ per cent. Its November Statement on Monetary Policy reaffirms the Reserve Bank’s view that the NAIRU is 4½ per cent.
In his new book, Let’s Tax Carbon, Professor Ross Garnaut presents compelling evidence that the NAIRU is no higher than 3.5 per cent. Garnaut cites Keynes in 1925, who observed that persisting with a wrong policy will certainly achieve the lower inflation desired, whatever the unnecessary human cost.
Garnaut points out that inflation trending down but only slowly would require higher interest rates only if there were signs of accelerating increases in market-determined wages or increases in inflationary expectations – but neither of these has been evident.
Lastly, the Reserve Bank warns that “weak productivity growth presents upside risks to inflation”. As the Productivity Commission points out, productivity growth accounts for almost all the improvement in Australians’ living standards since Federation. So stronger actual productivity growth is good for living standards.
But the Productivity Commission also warns against relying on quarterly estimates of productivity growth, since they are revised constantly and never settle.
Further, the Productivity Commission has found that measured productivity in health services, into which an ever-increasing proportion of the workforce is moving, is very low, but that, when improvements in the quality of life are counted, Australia’s health productivity ranks third out of 28 comparable nations.
Is the Reserve Bank wanting health and aged care workers with low measured productivity to quit and move into high-productivity mining and agriculture so that it can feel comfortable about reducing the cash rate?
It is bizarre that the Reserve Bank monitors quarterly productivity statistics in setting the cash rate. The Reserve Bank has referred to measured productivity in the minutes of every board meeting held in 2024. They were never designed for that purpose and cannot perform it.
By arbitrarily and wrongly defining full employment as unemployment at 4½ per cent, the Reserve Bank Board will succeed in getting underlying inflation back into the 2-3 per cent band. But this will cause misery for vulnerable working Australians and small business owners that is entirely avoidable.
Craig Emerson managing director of Emerson Economics. He is director of the APEC Study Centre at RMIT University, a visiting fellow at the ANU and adjunct professor at Victoria University’s Centre of Policy Studies.