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The Reserve Bank has lifted the cash rate to 4.6 per cent and governor Michele Bullock has acknowledged a recession could be possible if inflation expectations rise, despite inflation being driven by petrol prices linked to the war on Iran.
The Reserve Bank has raised the cash rate to 4.6 per cent, its highest level in 15 years, and warned further hikes could come if needed.
Governor Michele Bullock told journalists the bank would do what it had to do to bring inflation down. Economist Greg Jericho writes that without the increase in petrol prices driven by the war on Iran, inflation in August would have fallen. Instead, inflation sits at 4.0 per cent, mainly driven by petrol prices and a massive boom in datacentres that are not yet delivering productivity benefits.
RBA Defends Mandate Amid Employment Concerns
The Reserve Bank's enacting legislation gives it a dual mandate of price stability and the maintenance of full employment in Australia. Jericho argues the RBA seems to ignore the full employment aspect overall, and Australians now need to worry about a recession. After Bullock announced the cash rate was being raised to 4.6 per cent, the ABC's Alan Kohler told Afternoon Briefing that she defines full employment in terms of inflation.
He said there is really only one mandate that means, and that mandate is inflation. The market also understands this. After the RBA's July meeting, markets predicted no rate rise this month and maybe no more to come. Now a rise to 4.85 per cent is priced in before March next year.
Ampol's interim profit this year rose 376 per cent, and its share price has risen so much since the war on Iran began that Woodside and Santos seem like poor cousins. Jericho says the RBA is devoted to getting inflation under 3 per cent regardless of what is causing that inflation.
Inflation Targets Drive Economic Strategy
Bullock said the RBA was not failing to deliver full employment because the full employment target is the unemployment rate, or the level of employment which is consistent with low and stable inflation. She said the rate of unemployment is actually a bit tight and not consistent with low and stable inflation.
With inflation at 4.0 per cent, the RBA is worried people might think this clearly abnormal period is normal and that inflation will always be above 3 per cent. The governor was asked if she could see a situation where the economy would need to be put into recession to get inflation to the midpoint of 2.5 per cent. Bullock replied that she hopes it is not needed, but that there are scenarios in which it might have to happen.
She said the scenario she is thinking of is if inflation expectations get away from us, and people start saying three point something or four is fine. If that gets away, she said, you might need quite a dramatic slowdown in the economy. Jericho argues that lowering core inflation from 3.6 per cent to under 3 per cent does not justify a recession.
Recession Risks and Job Market Realities
He notes the central bank is suggesting a recession could be on the table if people start considering inflation between 3 and 4 per cent acceptable, even if it is not their central base case. Bullock once again on Tuesday told journalists that rising unemployment does not mean job losses. What it often means, she said, is that people might be taking longer to find a job.
Jericho says she is technically right, but that her statement that the bank will do what it has to do to get inflation down shows skewed priorities. Bullock did add that if massive job losses and a massive increase in the unemployment rate can be avoided, that is a really important thing to try to do. Jericho argues avoiding massive increases in unemployment is important, but apparently not a dealbreaker for the RBA.
Historical Context of Recession Impacts
Recessions are horrible things, and many a central bank has come a gutser thinking they can just lower rates and get things going again. During Covid the percentage of adults with a job fell by as much as during the 1990s recession, but that was due to lockdowns, not economic conditions, so the recovery was very quick. The GFC was almost a recession, but the percentage of adults with a job fell much less than in the 1990s recession.
Recessions over the past 55 years have seen the level of men in full-time work fall and never recover. Jericho writes that this might be the price we have to pay to lower inflationary expectations from 3.5 per cent to 2.5 per cent. He argues the RBA's focus on inflation over full employment risks lasting damage to the labour market.
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