The RBA should keep its finger off the interest rate trigger
With unemployment tumbling in February, the Reserve Bank of Australia (RBA) should resist the urge to raise interest rates, says Australia Institute Chief Economist Greg Jericho.
Unemployment fell dramatically in February, defying the expectations of many policymakers and economists.
While the RBA has genuinely seen low unemployment as a key driver of inflation, Jericho said their belief is misguided.
“The Reserve Bank, we know, has this belief that unemployment needs to rise to lower inflation,” he said on the latest episode of the Dollars & Sense podcast.
“We here at the Australia Institute and Centre for Future Work have been saying, ‘no, that’s completely wrong’.
“Inflation has not been rising and falling because there’s more or less unemployment in the system – it was because of what has been happening on the supply side, what’s happening with corporate profits.”
This view was supported by a 2023 report from the Organization for Economic Cooperation and Development (OECD), which found that high corporate profits was a more significant factor in driving inflation after the Covid-19 pandemic than wages.
A pretty massive change in the trend rate of unemployment pic.twitter.com/OXhb68RDAH
— Greg Jericho (@GrogsGamut) March 21, 2024
“Stop trying to put people out of work just to get inflation down. It’s a stupid thing to do,” said Jericho.
“And, actually, these figures kind of confirm that.
“Inflation has been slowing and what have we seen? Unemployment drop!”
The drop in the seasonally adjusted jobless rate, from 4.1 to 3.7 per cent, means roughly 116,000 additional Australians were in work in February. This represents the single biggest improvement since the early 2000s, outside the core years of the pandemic.
The next interest rate decision will be handed down by the RBA on 7 May.
Dollars & Sense is available on Apple Podcasts, Spotify, Pocket Casts, Google Podcasts or wherever you get your podcasts.
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