ANALYSIS: It won’t be easy. History shows that when central banks aggressively raise interest rates, jobs are the casualty.
To millions of Australians, Lowe has become known as the man who is inflicting financial pain on households by aggressively raising interest rates after forecasting they would not increase until 2024.
It won’t be easy. History shows that when central banks aggressively raise interest rates, jobs are the casualty. The unemployment rate hit 11 per cent in 1992 after the RBA lifted the cash rate to 17.5 per cent to tame rampant inflation in former prime minister and treasurer Paul Keating’s “recession we had to have”.
Moreover, last week’s national accounts showed that GDP per hour worked fell 3.5 per cent over the year to the December quarter 2022. The decline in labour productivity pushed up nominal unit labour costs by 7.1 per cent. So adjusting for output, labour costs may be running higher than the wage price index indicates.Hence, Lowe says reviving productivity will be crucial to being able to sustain a low unemployment rate as the bank lifts interest rates.
St George Bank chief economist Besa Deda says reducing inflation with interest rates and keeping unemployment low is a difficult task because of the 18-month lag in monetary policy. The RBA board is raising rates in real time and trying to judge what the full impact will be by late next year. Pendal Group’s head of income strategies, Amy Xie Patrick, told the summit that “soft landings are pretty rare”.
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