Reserve Bank Governor Michele Bullock has fleshed out the central bank's thinking behind its surprise decision to keep interest rates on hold this month.
Author
- John Hawkins
Head, Canberra School of Government, University of Canberra
In a speech today to the Anika Foundation , Bullock said there has been:
meaningful progress in bringing inflation down.
But the Reserve Bank is waiting for confirmation that underlying inflation has actually moved back towards the mid-point of its 2% to 3% target band:
We still think it will show inflation declining slowly towards 2.5%, but we are looking for data to support this expectation.
The governor was pleased to see the progress on inflation did not come at the cost of jobs growth. Employment has remained around an all-time high as a proportion of the population. Comparable countries have not managed as well as this.
The Reserve Bank has cut interest rates twice this year, and said policy is leaning towards further cuts by the end of the year.
The dual mandate
The Reserve Bank's 2-3% inflation target is well known. But it is not the sole focus of policymakers. The bank actually has a dual mandate of inflation and employment, which was the topic of Bullock's annual speech to Sydney's financial community.
The Reserve Bank Act charges the bank's monetary policy board with setting monetary policy:
in a way that, in the Board's opinion, best contributes to:
(i) price stability in Australia; and
(ii) the maintenance of full employment in Australia.
Full employment has been enshrined in legislation as a goal of the central bank since the 1940s.
Last week, the monthly employment report unexpectedly showed a jump in unemployment to 4.3% in June after five months as 4.1% as more people looked for work.
In her speech, Bullock said while some of the coverage suggested the increase was a shock, the employment figures over the whole of the June quarter were in line with the bank's forecasts.
She did not think it would have meant a different decision at the last board meeting if it had been known then.
Are the twin goals in conflict or complementary?
Some other central banks , such as the US Federal Reserve , also have dual mandates.
In the long run, there is no conflict between these goals. In the governor's words:
Low and stable inflation - or price stability - is a prerequisite for strong and sustainable employment growth because it creates favourable conditions for households and businesses to plan, invest and create jobs without having to worry about inflation.
Even in the short run, the two goals often involve no conflict. When the economy is overheating, inflation is high and unemployment low, so it is clear interest rates should be raised. During a recession, inflation is low and unemployment high, so it is clear interest rates should be lowered.
But there are times when the implications from the two goals clash. A surge in oil prices, for example, could lead to both higher inflation (suggesting interest rates should be raised) and weaker economic activity (suggesting interest rates should be lowered).
The governor said the bank's response may depend on the likely longevity of such a shock:
If a supply disruption is temporary and modest, monetary policy should mostly 'look through' it. Raising interest rates makes little sense if inflation is expected to ease once temporary supply disruptions are resolved - it would only weaken the job market.
By contrast, when a supply shock is likely to have a longer lasting effect on the economy and inflation there may be stronger grounds for monetary policy to respond.
The outlook
In its latest published forecasts , in May, the bank said that if, as markets expected, it lowers its cash rate target to 3.4% by the end of the year, then unemployment would rise marginally, to 4.3%, while its preferred measure of underlying inflation drops to 2.6%.
The Reserve Bank will release its updated forecasts after its next policy meeting on August 12, when it is also expected to cut interest rates.
Better monthly inflation data on the way
The Reserve Bank governor has made clear she regards the quarterly inflation series as a better guide than the current monthly series. At her May press conference she said :
We get four readings on inflation a year.
The Australian Bureau of Statistics has announced it is upgrading the monthly consumer price index (CPI) with effect from the October 2025 reading. It will then have the same coverage as the current quarterly CPI. But it will still be a more volatile measure than the quarterly.
The bank will go through a learning experience becoming familiar with the new monthly series.
John Hawkins was formerly a senior economist at the Reserve Bank.
