RBA’s inflation fight may put Australian employment at risk

The Reserve Bank of Australia has raised its cash rate to 4.6%, while markets are pricing in an increase to 4.85% by March next year. The article argues that this policy risks recession and job losses.

The RBA’s legislation gives it a dual mandate: price stability and full employment. In the author’s assessment, however, the bank is primarily focused on bringing inflation back to its target range.

Petrol prices drive inflation

Inflation stood at 4% in August, with petrol prices linked to the war in Iran making a significant contribution. Without that increase, inflation would have fallen, while core inflation remained at 3.6%.

Ampol’s interim profit rose by 376% during the same period. Household spending fell in August after the increase caused by petrol purchases was excluded.

RBA leaves room for a sharp slowdown

RBA governor Michele Bullock said higher unemployment does not necessarily mean job losses, because people may simply take longer to find work. She also said the bank would try to avoid a large rise in unemployment.

Bullock nevertheless left open the possibility that restraining inflation expectations could require a “quite dramatic slowdown” in the economy. She said that risk could arise if people began to regard inflation of 3% to 4% as acceptable.

Recessions leave lasting employment damage

The article points to the long-term effects of previous recessions. After the recession of the 1990s, it took a decade to recover the number of jobs, while the level of men in full-time work failed to fully recover after recessions over the past 55 years.

The author questions whether a recession would be justified to reduce inflation expectations from 3.5% to 2.5%.