Reserve Bank defends tactics, says 200,000 more people would be out of work with aggressive hikes
The Central Bank defended its tactics in fighting inflation and said that if it raised interest rates more aggressively, around 200,000 more people would be unemployed and mortgage holders would face much higher repayments.
In a speech in Norway overnight, the bank’s chief economist, Sarah Hunter, released internal modeling showing that if the RBA raised interest rates as high as some other countries, inflation would fall faster before rising again in recent months.
The bank has a dual mandate to keep as many people in work as possible while keeping inflation between 2 and 3 percent. It has come under attack from some economists who argue that interest rates should be raised faster and higher after the pandemic.
Shadow treasurer Tim Wilson told his byline that the Reserve Bank’s mandate needed to be rethought and it should focus more on reducing inflation.
The RBA increased the cash rate from 0.1 per cent at the beginning of 2022 to a peak of 4.35 per cent in November 2023. In contrast, nearly all other central banks charged higher cash interest rates, including Canada (5 percent), the United States (5.25-5.5 percent), New Zealand (5.5 percent) and the United Kingdom (5.25 percent).
Hunter said the Federal Reserve had consciously decided not to keep interest rates as high as other countries in order to protect the broader economy, including the job market. Unemployment remained steady at around 4.1 percent, reaching much higher levels in many other countries.
He said the bank was modeling the economic downside that would occur if the Central Bank followed the path of its counterparts abroad.
Interest rates are expected to reach 5.5 percent by the end of 2023, gradually falling to the current cash rate of 3.85 percent by the beginning of this year.
“It is not surprising that a sharper rise in interest rates would reduce the peak level of inflation and accelerate the pace of subsequent disinflation,” he said.
“But a more contractionary policy path would result in higher unemployment.”
Hunter said the higher cash rate, which would increase repayments on a $600,000 mortgage by almost $500 a month, would reduce headline inflation to 2.5 percent last year. The lowest level reached was in June with 2.9 percent.
But the “inflation surge” that has led the RBA to raise interest rates this year could have occurred even with a higher cash rate.
The country’s unemployment rate would begin to climb, reaching 5.3 percent in late 2025. At 5.3 percent, the number of unemployed people would be 190,000 more than the current level.
Interest rates would remain above the level the Central Bank maintains for the three years between 2022 and this year.
Hunter said there was no set path for the central bank to reduce inflation.
“Some chose to raise policy rates sharply and slow their economies quickly. The RBA board opted for a more gradual increase and then a more gradual decrease in policy rates, but were very careful that this strategy relied on inflation expectations remaining stable,” he said.
The reserve analysis did not capture the broader economic impacts of higher interest rates, including the impact on home construction, investor activity in the real estate market and wage increases.
Financial markets expect the Central Bank to raise interest rates to 4.1 percent before the May budget.
However, Betashares chief economist David Bassanese said the war in Iran could force the bank to postpone the interest rate increase.
He said that the increase in oil prices will increase inflation but will also limit consumers’ spending.
“However, on balance, if rising geopolitical tensions persist and escalate, it will make the RBA less likely to raise rates amid this uncertainty,” he said.
Hunter’s speech sparked calls for action from the Australian Prudential Regulation Authority after concerns emerged that investor activity in the property sector was contributing to higher-than-expected inflation.
The Greens’ finance and housing spokeswoman, Barbara Pocock, said the authority should tighten regulations on bank loans to investors and first-time buyers should be given the opportunity to own property.
“This housing crisis is heading towards a point of no return. We urgently need to cool the overheated investor loan market,” he said.
“APRA must intervene to level the playing field to give first home buyers a chance. It must use all the tools in its toolbox to rein in investor lending which is worsening the housing affordability crisis.”
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Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
