Yahoo Finance Plummeting unemployment means RBA must hike more aggressively
OPINION
As Australia’s unemployment rate plumbs depths not seen in nearly 50 years, the onus is now on the Reserve Bank (RBA) to adopt an even more aggressive approach to hiking interest rates.
In what is good news on the economy, the unemployment rate dropped to 3.5 per cent in June, which is a level not seen since 1974.
At the same time, employment rose by a quite-fantastic 88,400, the workforce participation rate hit a record 66.8 per cent, while the underemployment rate remained low at 6.1 per cent.
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The overall labour force data confirmed what every business owner knows – there are few if any available workers for them to employ as they look to expand.
It hints - as the NAB Business Survey showed yesterday - wages growth is poised to boom, and are on track to hit a 30-year high above 4.5 per cent by the early part of 2023.
While the news is good, it points to extreme overheating in the economy and that spells concerns for inflation, which is already set to reach a 30-year high around 7.5 per cent.
It also means the 1.35 per cent cash rate recently set by the RBA, is too low and inappropriate for the state of the economy and especially inflation.
The RBA squibbed hiking interest rates earlier this year and has been pussy-footing around since then with only modest rate hikes.
This tardiness is another policy misstep which means inflation will be higher for longer than if it had acted earlier to nip at least some of the inflation pressures in the bud.
The RBA can catch up
The central bank meets every month and, in the process, can lift interest rates in reaction to the news of high inflation and evidence that the labour market is overheating.
It could - and perhaps should - hike interest rates by 75 basis points, to 2.10 per cent, at its August meeting.
With today’s labour force data, and if the June quarter inflation report - which is due for release on July 27 - is high, it could even hike 100 basis points as it works to meet its inflation goals.
While a 75 or even a 100-basis-point interest rate hike may seem extreme, the Bank of Canada shocked markets overnight with a 100-basis-point hike, to 2.5 per cent.
And, of course, the US Federal Reserve hiked interest rates 75 basis points at its last meeting and the market is pricing in a move of either 75 or 100 basis points at its next meeting in late July.
There is a real urgency among global central banks to move monetary policy to a neutral-to-slightly restrictive stance so inflation pressures can abate.
The RBA needs to join the club. This means getting the official cash rate to a level around 2.5-3.0 per cent as soon as possible.
A path to that goal could be along the following lines:
August - +75bps to 2.10 per cent
September - +50bps to 2.60 per cent
October - +25bps to 2.85 per cent
After that, the RBA can probably afford to sit back and judge the cumulative effect of its policy tightening and check developments in the global economy, not just on inflation, but also on economic activity.
If, however, there are still signs of persistent high inflation, a wages boom or over-full employment, it can tweak rates higher still.
If growth does slow, it can then have an extended period where rates are on hold and it can reassess conditions into 2023.
For now - even with some signs in commodity prices that inflation is set to ease late this year and into 2023 - the incredible strength in the labour market means the RBA needs to hike interest rates and hike a lot.
Eyes will be on the June quarter CPI and actions of the US Federal Reserve in two weeks’ time to see whether the RBA will go 50, 75 or even 100 basis points at its August meeting.
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