The central bank uses joblessness to get the inflation rate it wants. Yet there is little justification for doing so.
It is now unarguable that the Reserve Bank’s dubious economic models are driving its monetary policy decisions. Chillingly, if its models are wrong, so have been, and will be, its decisions on interest rates.released last Friday will find no reference to the NAIRU, yet its influence is everywhere. Driving monetary policy is the Non-accelerating Inflation Rate of Unemployment, which the Reserve Bank estimates at 4.5 per cent.
The unemployment rate is 3.5 per cent. No prizes for guessing the Reserve Bank’s official forecast for the unemployment rate. Yep, it’s 4.5 per cent from around the middle of next year, bang on its estimate of the NAIRU. And the unemployment rate is forecast to remain at 4.5 per cent until the end of the forecasting period in December 2025.Perhaps we should be thankful for small mercies. Back in 2018, the Reserve Bank estimated the NAIRU at 5 per cent.
The RBA shouldn’t rule out the possibility that the next interest-rate move might be downwards as the economy slows to a crawl. In Australia and elsewhere, union membership among workers has plummeted and workers have not been able to recoup increases in their cost of living through wage rises. Indeed, the Reserve Bank reports that firms continue to use bonus payments to attract or retain staff and to compensate for cost-of-living pressures. This seems rational behaviour by firms scarred by the pandemic-induced recession and worried about an ongoing economic slowdown triggered by the Reserve Bank’s sharp tightening.
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