Reserve Bank’s jobs strategy poses inflationary risk, economists warn
The Reserve Bank has risked placing too much emphasis on shielding jobs growth at the expense of reducing inflation, some economists have warned.
The Reserve Bank has risked placing too much emphasis on shielding jobs growth at the expense of reducing inflation, some economists say, as Australia remains a laggard in the global battle to tame price pressures.
The warning follows release of fresh forecasts by the International Monetary Fund on Wednesday that showed inflation in Australia was projected to be among the highest of all advanced economies in 2025 at 3.6 per cent, but it would have a stronger jobs market.
Former RBA board member Warwick McKibbin said the central bank should have prioritised getting inflation down as “quickly as possible” rather than preserving jobs, arguing that other countries where rates had been raised more aggressively didn’t have vastly different employment outcomes.
The key jobless measure in Australia and the US is 4.1 per cent, but the US Federal Reserve raised its interest rate to 5.5 per cent while Australia’s official cash rate climbed to 4.35 per cent.
“The Reserve Bank should have got inflation down faster,” Professor McKibbin said.
“You’re better off to move on inflation more quickly.
“The RBA has got the problem now that they have to have interest rates well above the inflation rate to slow the economy, and so they’re not cutting rates.”
Under the RBA’s agreement with the federal government, the central bank has a dual mandate to contain price pressures while also preserving employment.
RBA governor Michele Bullock repeatedly stressed the RBA’s “deliberate strategy” to maintain strong jobs growth by raising interest rates less than peer central banks. Alongside the US, central banks in New Zealand, Canada, Britain and Europe have all raised interest rates to at least 5 per cent.
RBC Capital Markets chief economist Su-Lin Ong said the RBA had placed “more weight” on the objective of preserving jobs growth than low inflation.
“We’re yet to see whether this strategy is a successful one. Inflation is too high, unit labour costs are high, productivity is too low,” she said.
“It does all suggest moving back to within [the 2 to 3 per cent] target inflation on a sustainable basis but it’s still challenging.”
Ms Ong said the central bank would have been well advised to tighten monetary policy more aggressively than it ultimately did.
“They could have gotten inflation back to target a bit quicker … that probably would have been a more prudent monetary policy,” she said
The RBA’s focus on preserving low unemployment, KPMG chief economist Brendan Rynne said, meant it had underestimated the impact of public sector job creation on the labour market.
“I don’t think that they appreciated that there’s going to not only be the maintenance of job gains in the private sector but also a continual increase in employment in the public sector,” Dr Rynne said.
Approximately two-thirds of the jobs filled have been in the “non-market sector” covering the public sector, education and the health and social services sectors since the RBA began raising rates 2½ years ago.
Following stronger than expected jobs data and firm retail trade figures, investors have pushed back their bets for RBA rate cuts. Markets are now priced for a quarter-point cut at the RBA’s May 20 meeting, just four days before the cut-off date for a federal election.
HSBC chief economist Paul Bloxham said the RBA’s strategy of keeping interest rates higher for longer risked leaving it unable to cut rates altogether.
“If inflation just takes a long time to come down, and we stay close to full employment, the next cycle might come along where inflation starts to pick up globally,” Mr Bloxham said.
While central banks in the US and New Zealand have already delivered jumbo half-percentage-point rate cuts, most analysts expect the RBA to more gradually loosen monetary policy.
EY chief economist Cherelle Murphy said “structural issues” facing the economy meant the RBA would be unlikely to cut interest rates aggressively.
“There’s ongoing structural issues in the economy which would suggest that putting in place much easier monetary policy wouldn’t be appropriate,” she said, citing the energy transition and Australia’s ageing population.
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