OPINION: Australia’s central bank must neither overtighten nor let inflation quickly take off again. But historic labour demand is making the calls difficult.
As rates go up into what is considered restrictive territory, the hurdle for more rate increases is higher.
The lessons of the 1970s couldn’t be clearer; not only do you need to get inflation back to target after such a significant overshoot, but you must maintain a moderately tight stance of policy for an extended period to stop inflation taking off again. The RBA’s ego wants them to pause, their experience tells them to increase, may be even by 50 basis points, but their nerves are shredded after two years of serious missteps. They will probably pause.
Like dry hot winds powering a bushfire, this mighty labour demand is dangerous. Our federal government may have made one of the biggest errors of their short tenure byOver the first half of 2023, this strong demand for labour has been augmented by a surge in net overseas migration, which is adding fuel to the labour market fire.
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