RBA governor Philip Lowe ‘had already raised need of employment target’

Leading economists say the key recommendation to elevate full employment alongside price stability as equal considerations reflects a shift already taken under the leadership of Philip Lowe.

Judo Bank economic adviser Warren Hogan.

Leading economists say the key recommendation of the RBA review to elevate full employment alongside price stability as equal considerations in the setting of monetary policy reflects a shift in the approach of the central bank already taken under the leadership of Philip Lowe.

Economic adviser for Judo Bank Warren Hogan and AMP Capital chief economist Shane Oliver said the RBA under Dr Lowe had demonstrated more concern over its full-employment objective than other central banks, and was prepared to hike less ­aggressively and take longer to return inflation to target.

Both economists argued the RBA review effectively endorsed this approach, with Dr Lowe himself arguing its recommendations would not “fundamentally change how the economy works” and only achieve “improvements at the margin”.

However, Dr Oliver warned that expanded access to multi-­employer bargaining and greater labour market regulation could make it harder for the RBA to achieve the full-employment objective. He also noted that, in the short term, the dual objectives of full employment and price stability could work against one another and there was a risk that in “trying to bring inflation back to target that it threatens the full-employment objective”.

“I think there is always a short-term challenge between the two,” he said. “But providing things are managed well, I don’t think there’s a long-term inconsistency there.

“History tells us that unless you’ve got price stability – or low inflation – you’ll threaten full employment on a longer-term basis.”

Dr Lowe said on Thursday that the bank’s current assessment was that full employment in Australia was a jobless rate “probably in the low 4s” and, given the difficulty in pinpointing full employment, the bank would not be explicitly targeting an unemployment rate when setting interest rates.

He also dismissed suggestions that full employment and price stability were in conflict, arguing that “you can’t have full employment if you don’t have price stability”, although he acknowledged there were short-term trade-offs.

“At the moment we are trying to return inflation to 2-3 per cent. The ultimate objective there is to make sure that people have jobs and the country can operate at close to full employment.

“So those two things are not in conflict. In the short run there’s a trade-off, obviously, but in the long run they’re perfectly consistent,” he said.

While the RBA review was seen as an endorsement of Dr Lowe’s willingness to return inflation to target more slowly by 2025, Mr Hogan noted most central banks were trying to reach their targets by 2024. “I personally would probably want to get inflation down more quickly,” he said.

Mr Hogan also questioned why Dr Lowe had elevated full employment as a consideration in his management of monetary policy, asking: “Whose decision was it to adopt this strategy? There’s clearly been this shift – what we don’t know right now is if it was the ­governor and RBA board who has decided this, or if they got the ‘OK’ from the Treasurer.”

Dr Oliver said the RBA was “presently giving more weight to the full-employment objective than other central banks” but suggested Dr Lowe was correct to take a more balanced approach.

However, he also issued a warning over Labor’s plan to expand access to multi-employer bargaining, arguing it could make it harder for the RBA to achieve the full-employment objective.

He said central banks had more control over inflation than full employment because the labour market was affected by “all sorts of other things, such as the broad competitiveness of the economy”.

“If anything, we might be heading in a more regulated direction, which some might argue would make it harder to achieve the full-employment objective,” he said.

“If we go down the path of more regulation then it will complicate the Reserve Bank’s job.”