Aussies have never had it so good, says Moody’s Analytics as it forecasts the RBA to go harder on rate hikes

Australians can cope with more aggressive interest rate hikes, as a jobs bonanza buffers households from the inflationary storm, Moody’s Analytics says.

Moody’s Analytics expects the RBA to become more aggressive on interest rates hikes given Australia’s tight labour market Picture: NCA NewsWire / Gary Ramage

Australians can cope with more aggressive interest rate hikes, with Australia’s jobs bonanza set to buffer households from the inflationary storm, Moody’s Analytics says.

Moody’s economist Harry Murphy Cruise said “Australia has had a stellar run over the past two years”, with unemployment at a five-decade low and “stratospheric” job vacancies.

“The participation rate has never been higher,” he said.

“These gains have been broadbased. Female participation is a full percentage point higher than pre-pandemic levels.

“Similarly, younger workers are benefiting from the surplus of jobs. The unemployment rate for those aged 15 to 24 is hovering around record lows, some 3.4 percentage points below pre-pandemic levels. And like a “bottle of wine, it’s only getting better with time”.

The upbeat assessment is despite many households feeling they are financially worse off than they were six months ago — before Russia’s invasion of Ukraine and a prolonged pandemic-fuelled global supply-chain crunch sent fuel and grocery prices soaring.

But Mr Murphy Cruise believes the RBA can act even more aggressively, given the tight labour market, as year-end forecasts of inflation hurtle towards 7 per cent,

“Rising inflation is the key hurdle. At 5.1 per cent year on year, inflation is at its highest rate in two decades. We expect it to soon reach 6.5 per cent,” he said.

“In Australia, much of the current price rises are coming from supply disruptions to food and fuel. But growing domestic demand is also starting to contribute.

“With the incredibly strong labour market, the Reserve Bank of Australia can act more aggressively against inflation than otherwise would be the case; jobs support families and families support businesses. Yes, higher rates will dent demand, but with employers screaming for more workers, we shouldn’t see higher borrowing costs manifest into higher unemployment.”

His comments came after Commonwealth Bank’s Matt Comyn, Crown’s outgoing CEO Steve McCann and Harvey Norman’s Gerry Harvey took a “glass half-full” view to the rapid interest rate hikes, saying that consumer spending is still stronger now than two years ago.

Mr Murphy Cruise said the RBA board is “hellbent on letting households and investors know it is serious about inflation” and returning it bank to its legislated target of 2-3 per cent.

“With jobs secure, the central bank believes it can go a little further in putting its money where its mouth is,” he said.

“We expect the RBA to continue on this trend. Our latest forecasts see the cash rate sitting at 2.35 per cent by the end of the year. By the end of 2023, we expect the cash rate to nudge 3 per cent, roughly in line with the neutral rate.

“This profile is only possible because of the exceptionally strong labour market — a handy ace up the sleeves of policymakers.”

Originally published as Aussies have never had it so good, says Moody’s Analytics as it forecasts the RBA to go harder on rate hikes