For interest rates to fall, 75,000 more people will be out of work

Up to 75,000 Australians face being shut out of a job as the Reserve Bank attempts to bring down inflation as bank governor Michele Bullock admits the nation’s “unusually tight” jobs market is a factor pushing up prices.

As Treasurer Jim Chalmers’ overhaul of the Reserve Bank passed through the Senate, Bullock used a speech in Sydney on Thursday to argue underlying inflation was still too high for the bank to consider a cut to official interest rates “in the near term”.

RBA governor Michele Bullock says the nation’s strong job market is helping keep inflation too high.Credit: Bloomberg

In a blow to the government’s hopes of a pre-election interest rate cut early next year, Bullock told the Committee for Economic Development of Australia that while quarterly headline inflation had fallen to 2.8 per cent, which was within the bank’s 2-3 per cent target range, underlying inflation was still at 3.5 per cent.

She said a key issue was the jobs market, which, by comparison with other nations, remained strong.

“At present, we judge that conditions in the labour market remain tighter than what would be consistent with low and stable inflation,” she said.

“Australia’s labour market conditions appear unusually tight relative to those in other peer economies. Conditions in labour markets in those economies have eased significantly and unemployment has increased, such that labour markets are now assessed to be close to balance or have spare capacity.

“Given the tightness in Australia’s labour market, along with our assessment that the level of demand still exceeds supply in the broader economy, we expect it will take a little longer for inflation to settle at target in Australia.”

The bank is forecasting unemployment to rise to 4.5 per cent by the middle of next year, helping to bring underlying inflation down to 2.5 per cent by the end of 2026.

Unemployment has been steady around 4.1 per cent since May. During that period, more than 221,000 jobs have been created, while the participation rate – the number of people in work or looking for it – has climbed to a record high.

A jobless rate of 4.5 per cent would mean an extra 75,000 people out of work.

The RBA is forecasting unemployment to rise to 4.5 per cent by the middle of next year.Credit: Fairfax Media

Bullock said since the bank started lifting interest rates in 2022, it had aimed to gradually bring down inflation while keeping as many people in work as possible.

Despite the fall in headline inflation, due in part to government energy subsidies and a drop in global oil prices, underlying price pressures were still too high for the bank to cut interest rates.

“As it currently stands, underlying inflation is still too high to be considering lowering the cash rate target in the near term,” Bullock said.

Any decision on rates is likely to be made by a new interest rate-setting committee within the Reserve Bank, one of several changes approved 31-26 by the Senate after a deal struck by the government, the Greens and crossbench senators.

The committee was a key recommendation of the independent review of the bank that Chalmers commissioned on coming to office in 2022.

The committee, which the Liberal Party has accused Chalmers of trying to stack with people who more supportive of lower interest rates, will be made up of members of the existing RBA board as well as people with a focus on monetary policy and the economy.

The current board will be more focused on overseeing the bank, which is responsible for the nation’s payments system.

The changes had been stalled in the Senate for several months after the Coalition, which went to the last election promising its own review of the RBA, ruled out supporting the reforms.

Chalmers recently resumed talks with the Greens, who argued for the bank to retain two powers it has held since its creation in 1959. Chalmers had sought to axe the ability of a government to overrule the bank and for the RBA to tell commercial banks where to direct credit. Neither of the powers has been used.

The reforms also change the charter of the bank’s precursor, which, since 1945, has included price stability, full employment and the “promotion of the economic prosperity and welfare of the people of Australia”.

Price stability, which covers the rate of inflation, and full employment are now the bank’s core functions, while prosperity and welfare of the nation are a general objective.

The independent review recommended the bank give equal consideration to “price stability and full employment”, but this prompted attacks from some members of the Coalition that this would enable the RBA to reduce its focus on inflation.

It was not included by Chalmers in his reform of the bank.

Chalmers said the changes reinforced the bank’s independence, modernised its structures and clarified its mandate.

“We’re ensuring Australia’s central bank remains world-class with a monetary policy framework fit to meet our current and future economic challenges,” he said.

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