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OPINION: Jobs boom more evidence RBA must hike rates

People going about their jobs cross a street in downtown Melbourne.
In February, unemployment hit a 13-year low, with 77,400 jobs created. (Source: Getty)

Australia is in the midst of an inflationary boom, a point further reinforced by this week’s remarkably strong labour force data.

In February, employment rose by 77,400 to a fresh record high. At the same time the unemployment rate eased to 4.0 per cent to be a few tenths of a per cent from hitting a 48-year low.

This is extraordinary. Rounding out the evidence of an overheating economy, the underemployment rate fell to its lowest level in 14 years at 6.6 per cent.

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There is no doubt the economy is booming and with the various indicators of demand for labour still strong, the unemployment rate is set to fall towards 3.5 per cent before the end of the year.

In many ways, this is no surprise.

The Reserve Bank (RBA) continues to hold the line on record-low stimulatory interest rates and it was only last month - when these labour market data were compiled - that it ended its unprecedented money-printing program.

The labour market data are sparking a pick-up in growth in labour costs. While the jury is out on just how high labour-cost growth will be in 2022 and into 2023, a path to 5 or even 6 per cent increases in business labour costs is in the mix.

Along with the record-high price for many commodities and the rising cost of many input costs to business, inflation is set to hit a 30-year high, above 6 per cent in headline terms, and will exceed 4 per cent in underlying terms in the next few quarters.

Which in turn begs the question about the RBA and its monetary policy stance.

Earlier this month, the RBA left the official cash rate at a record-low 0.1 per cent. It set that rate back in November 2020 when it was forecasting the unemployment rate to be 6 per cent at the end of 2022, with inflation around 1 per cent at the same time.

It was the right thing to do at that time because the coronavirus was impacting uncertainty and forcing lockdowns and it threatened to fully undermine the economy.

RBA must hike

The current unemployment rate is 4.0 per cent and will end 2022 around 3.75 per cent with inflation four or even five times the rate the RBA expected when it set rates at 0.1 per cent.

The RBA is clearly making an error not hiking in the wake of this very different economic environment.

Apart from a massive misreading of the economy - which is possible, given the RBA’s recent track record - the other reason for delaying rate hikes may be the proximity of the federal election, which is likely to be held on May 21.

There are two RBA board meetings between now and the election.

The RBA has a chance to start the process of repairing its damaged credibility with an overdue tightening in monetary policy in April and again in the months after that.

Reserve Bank of Australia governor Philip Lowe during an address at the National Press Club.
RBA governor Philip Lowe has hinted rates may rise sooner than initially forecast. (Source: Getty)

Many other central banks have already embarked on such a tightening strategy, the latest being the US Federal Reserve, which not only hiked its interest rates by 0.25 per cent to 0.5 per cent, but signalled it would need to hike rates at every remaining meeting in 2022 and into 2023. This will take US rates to around 2.5 per cent.

The RBA could cite the tight labour market, the inevitable lift in wages growth and the certain inflation surge to hike rates to 0.25 per cent in April and 0.50 per cent in May.

These would be early shots to restore some policy credibility, and moves that would not materially disrupt the economic-growth momentum of the economy and might just start the process of bringing inflation back under control.

Failing an April move, at its May meeting, the RBA will have the March-quarter inflation data.

The quarterly headline rise is likely to be around 2.0 per cent, which will bring the annual increase to 5.0 per cent.

The trimmed-mean measure on inflation is likely to rise by around 1.2 per cent for an annual rise of 3.5 per cent.

If, as is likely, the run of local and global news confirms solid growth and still-persistent inflation pressures, the RBA will have all the information it needs to hike in May.

If it does not, it will undermine a critical part of its mandate, which is having inflation between 2 and 3 per cent over time.

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