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Why the RBA wants you to get back to work

  • March 17 2021
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Why the RBA wants you to get back to work

By Cameron Micallef
March 17 2021

In order for the RBA to reach its inflation targets, it needs Australia’s unemployment rate to fall to levels not seen since the 1970s, with higher wages to be the catalyst for rising inflation.

Why the RBA wants you get back to work

Why the RBA wants you to get back to work

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  • March 17 2021
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In order for the RBA to reach its inflation targets, it needs Australia’s unemployment rate to fall to levels not seen since the 1970s, with higher wages to be the catalyst for rising inflation.

Why the RBA wants you get back to work

The minutes from the bank’s March board meeting show the RBA is committed to keeping rates lower for longer, despite the rising prices in equities and house prices.

While the latest unemployment data released by the Australian Bureau of Statistics shows unemployment is trending in the right direction, the central bank notes it will continue to target the unemployment rate.

“Members agreed that a materially lower unemployment rate would be needed to generate wages growth in excess of 3 per cent, which in turn would be required to ensure inflation was sustainably in the 2 to 3 per cent target range,” RBA members said.

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The RBA was upbeat on the economic recovery, stating it was well underway and stronger than expected, but pointed to possible short-term headwinds as government support was withdrawn from the economy.

“Despite these generally positive developments, members agreed that wage and price pressures had been subdued and were expected to remain so for several years. The economy had been operating with considerable spare capacity and the unemployment rate had remained high,” RBA members explained.

“Further progress in reducing spare capacity was expected to occur, but it would take some time before the labour market would be tight enough to generate wage increases consistent with achieving the inflation target. There are likely to be relative price shifts due to changes in the balance of supply and demand during the pandemic, and the board would look through these transitory fluctuations in inflation.”

During a recent AFR summit, RBA governor Dr Philip Lowe reaffirmed the central bank’s economic policy, saying unemployment could drop from its current levels of 6.4 per cent to around 4 per cent, a level not seen since the 1970s.

“How low below 5 [per cent] is hard to tell and I certainly hope, and it’s not inconceivable, we could sustain an unemployment rate in Australia starting with a 3 [per cent],” Dr Lowe said.

He confirmed that a lower unemployment rate would help push Australia’s wages up.

“I also want to emphasise that the monetary stimulus is not just about achieving an inflation rate of 2-point-something,” he said.

“It is just as much about achieving the maximum possible sustainable level of employment in Australia. Unemployment is a major economic and social problem and the (RBA) board places a high priority on a return to full employment.”

The governor explained that wage growth heading into the pandemic was the lowest on record at just 1.4 per cent, opining it will take until 2024 for wage growth to rise by enough to put pressure on inflation.

“The evidence strongly suggests that this will not occur quickly and that it will require a tight labour market to be sustained for some time,” he said.

“Predicting how long it will take is inherently difficult, so there is room for different views. But our judgement is that we are unlikely to see wages growth consistent with the inflation target before 2024.”

Dr Lowe also said low interest rates were one of the factors contributing to the rise in housing prices, but he refused to use rates to curb growing prices. 

“I would like to reiterate that the RBA does not target housing prices, nor would it make sense to do so,” he said.

“There are various tools, other than higher interest rates, to address these concerns, leaving monetary policy to maintain its strong focus on the recovery in the economy, jobs and wages.”

Why the RBA wants you to get back to work
Why the RBA wants you get back to work
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About the author

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Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

author image
Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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