The Reserve Bank has admitted there is a dark side to its rate hikes which could be far worse than they expected – with more than 138,000 Australians at risk.
Reserve Bank admits unemployment could rise further meaning more than 138,000 will lose their jobs
The Reserve Bank has admitted that its aggressive rate hikes could push unemployment higher than expected – causing 138,000 people to lose their jobs over 18 months.
May’s jobless rate was near a 48-year low of 3.6 percent but the RBA expects it to reach 4.5 percent by the end of 2024.
It will see 137,846 people lose their jobs as the ranks of the unemployed rise to 653,746, up from 515,900 now.
In a labor force of 14.5 million people, this means a 26.7 percent increase in the number of unemployed people.
The Reserve Bank’s July meeting minutes indicated that more people could lose their jobs as a result of 12 rate hikes from May 2022, with further increases expected.
‘Higher interest rates can be expected to encourage households to save more, which will affect consumption,’ it says.
‘If that were to happen, labor demand would slow and the unemployment rate could rise beyond the rate necessary to ensure a return to target inflation over a reasonable period of time.’
The Reserve Bank has acknowledged that its aggressive rate hikes could push unemployment higher than expected.
Incoming Reserve Bank governor Michelle Bullock told a Newcastle audience last month that unemployment would need to rise to get inflation back to the RBA’s 2 to 3 per cent target by mid-2025 – down from 5.6 per cent now.
“If unemployment remains too low for too long, inflation expectations will rise, making it much harder for monetary policy authorities to bring inflation back down,” he told the Australian Industry Group, which represents employers.
‘There is a risk that if inflationary expectations tighten and wages respond to that and wage demand responds to that, we end up in a situation where it is very difficult to reduce inflation.’
In July, the Reserve Bank kept the cash rate at an 11-year high of 4.1 percent.
The unemployment rate in May was at a near 48-year low of 3.6 per cent but the RBA expects it to reach 4.5 per cent by the end of 2024 (pictured is a bartender in Sydney)
But minutes released on Tuesday hinted at further rate hikes.
‘Members agreed that some further tightening of monetary policy may be needed to bring inflation back to target within a reasonable timeframe, but this depends on how the economy and inflation evolve,’ it said.
Westpac chief economist Bill Evans said the Reserve Bank could raise rates again in August, taking the cash rate to 4.35 percent, as wage growth was likely to remain strong as a product of low unemployment.
‘Westpac expects that slower progress in reducing inflation, which may be evident in the June quarter inflation report, and ongoing tightening in the labor market, particularly as job vacancies remain historically high, will justify further tightening. ,’ she said.
The Reserve Bank is still concerned about the pace of wage growth ahead of June quarter inflation data released next week.
‘The labor market remained very tight despite some easing in conditions over the past month or so,’ it said in the July meeting minutes.
‘While nominal wage growth appears to have stabilized recently, members assessed that the environment would remain favorable for average growth in prices and wages under the level of labor market tightness.’