The RBA has ruled out setting an employment target, as it does with inflation, to guide the adjustment of interests rates, Michele Bullock said in her first speech since becoming bank governor last month.
In a talk on “complementarities and trade-offs” to a Sydney conference on Tuesday, Bullock fell into line with the Albanese government, saying the RBA had always had a twin mandate of achieving full employment alongside low and stable inflation.
However, while the central bank had a target of keeping inflation between 2% and 3%, “it would be unwise to specify a fixed numerical target for full employment”, she said.
One issue was that the meaning of “full” changed over time as the economy evolved. A single statistic such as unemployment was also inadequate as it failed to account for the 2.5m or so Australians who wanted to work but were not counted as jobless or sought to work more hours than there currently were, Bullock said.
“Much has been written over the past month on whether full employment means different things to the Reserve Bank and the government,” she said. “The answer is no – our objectives are complementary” even though the RBA’s focus was more on the short- to medium-term, and governments “rightly have a longer horizon”.
RBA watchers have speculated the combination of a new governor and the recommendations of a review into the central bank may diminish its determination to bring down inflation. On the latest forecasts – due to be revised in time for the 7 November RBA rates meeting – price increases will only slow to 3% by mid-2025.
Bullock said she was currently working with Treasury to “modernise and clarify” the bank’s objectives in the wake of the review. “These changes won’t, however, fundamentally change the way we formulate monetary policy.”
Bullock’s speech appears to be intended to reassure investors at home and abroad – and the public – that the RBA’s priorities remain unchanged.
“Our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing,” she said.
“It is possible that this can be done with the cash rate at its current level [of 4.1%] but there are risks that could see inflation return to target more slowly than currently forecast,” Bullock said. “The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation.”
Last week, the Australian Bureau of Statistics said the jobless rate had fallen in September to 3.6% even as the economy shed almost 40,000 full-time jobs. The ABS will release September quarter inflation figures on Wednesday that may elevate the odds of another rise in the RBA’s cash rate if they are on the strong side.
In theory, full employment was the maximum level of employment that was consistent with the RBA’s price stability mandate, Bullock said.
“Over time, low inflation and full employment go hand in hand,” she said. “Low and stable inflation is a prerequisite for strong and sustainable employment growth because it creates favourable conditions for households and businesses to make decisions about how to use their resources.”
“The employment and inflation objectives are also complementary when there are influences that expand the productive capacity of the economy – like strong productivity growth, successful innovation and expansions in the capital stock,” Bullock said.
On the impact of 12 interest rate rises totalling 400 basis points since May 2022, the new governor said “most Australian households and businesses have been resilient and our financial system remains strong”.
The effects of inflation excluding housing costs weighed twice as heavily on the spare cashflows of lower-income households compared with those on higher incomes, she said. The differential impact, though, was “offset” on average by the former’s stronger income growth.
Still, “[a]bout 5% of all variable-rate borrowers are estimated to be paying more for essential expenses and housing than they receive in income”, Bullocks said. “[T]his rises to about 25% for highly leveraged borrowers – those with loans amounting to at least four times their income.”
By contrast, she cited research by the central bank showing that tenants’ spare cash flow had lifted since 2021 as higher incomes – a product of a tight labour market – offset the higher cost of living and rising rents.
During the question and answer session, Bullock said the current Israel-Hamas war “was another symptom of the fragmentation that’s going on around the world”, prompting countries to think “much more about the security of their supply chains”.
“It used to always be about where do we go to get the cheapest supplies, cheap goods, cheap labour,” she said. “That [shift], ultimately, isn’t positive for a country like Australia, which has done a lot in terms of being an open economy and open to trade.”
“I think we’re dealing in just very uncertain times – even more uncertain than usual,” she said. “And it’s going to be really important to be watching the data, and what’s happening overseas, even more so.”
Bullock said there was a “balancing act” between higher inflation, taxes and interest rates reducing household consumption, and the existing or even widening savings buffers and the wealth effect of rising property prices.
For now, the RBA thinks “inflation expectations are still reasonably well anchored”, Bullock said. “The longer you remain out of that [2%-3%] band, the more likely it is you’ll become unanchored.”
