The Reserve Bank of Australia (RBA) is facing criticism for its reliance on interest rate hikes to curb inflation, with analysts suggesting the central bank wants people to become unemployed
to reduce spending. This strategy comes as June unemployment held steady at 4.4 per cent, increasing market odds of an August rate spike.
The Australian labour market is refusing to buckle. According to data from the Australian Bureau of Statistics (ABS), the unemployment rate remained at 4.4 per cent in June, even as the RBA implemented interest rate hikes this year. This resilience has shifted the outlook for the official cash rate, currently at 4.35 per cent.
Money markets reacted sharply to the steady jobs figure, with the odds of an August interest rate increase jumping from 20 per cent to 36 per cent, according to money markets.
The “One Lever” Strategy and Supply-Side Inflation
Critics argue the RBA is using a blunt instrument to solve a nuanced problem. Amy Remeikis, former political reporter with The Guardian and now chief political analyst at The Australia Institute, contends that the central bank is targeting demand-side spending when the actual drivers of inflation are supply-side issues, such as high energy costs and significant business investment in data centres.
“Except this is not inflation from demand side. This is not because we’re all running around buying couches and cars and having a whole heap of discretionary spending. This inflation comes from a supply-side issue. Cost of energy is too expensive, business investment, particularly in data centres, is very high and it’s driving inflation.”
Amy Remeikis, Chief Political Analyst at The Australia Institute
Because the RBA has only one lever
to deal with inflation, the result is a focus on increasing unemployment to dampen spending.
June Labour Market Data: Growth vs. Participation
The June figures reveal a complex tug-of-war. While approximately 76,300 Australians gained a job in June, the unemployment rate didn’t drop because more people entered the workforce. The participation rate rose to 67 per cent from 66.7 per cent, driven largely by those aged 55–64, whose participation rate grew by 0.8 percentage points to 70.6 per cent, according to The Conversation.
However, other indicators suggest a potential softening.
The Phillips Curve and the RBA’s Risk Tolerance
RBA deputy governor Andrew Hauser has highlighted the relationship between inflation and unemployment—known as the Phillips curve—to explain why the bank has seemed relaxed about job losses. The curve suggests that when inflation is high, a larger change in unemployment is required to bring it down.
This theoretical framework explains why Governor Michele Bullock has accepted the possibility of rising unemployment. While she stated she did not want 100,000 people to lose their jobs, the central bank’s priority has skewed toward softening price growth over protecting employment.
Economic Costs and Government Spending
The cost of these interventions is substantial. Independent economist Chris Richardson cited analyses suggesting a single rate hike costs the economy between $3 billion and $6 billion. Shane Oliver of AMP suggests the total impact, including anticipated future changes, could reach $7 billion.
There is also a tension between the RBA and the federal government regarding the source of inflation.
Critical Indicators for August 11
While the jobs data is a key input, the board is more focused on the June quarter inflation numbers, due for release next Wednesday.
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