Reserve Bank keeping interests at all time low. What's their end game? Blake Halligan explains.
The RBA is trying to achieve inflation that is sustainably within their 2 – 3% target range. They only have one tool at their disposal to try to achieve this: interest rates.
By keeping interest rates low, they are hoping this encourages spending within the economy and businesses have the confidence to expand. This should create a need for more staff and as more and more people are employed it will reduce the pool of available workers. If there is a shortage of labour, businesses will have to raise their wages to attract (and retain) workers. If these conditions are continued it should result in ongoing increases in wages. As the cost of labour increases for a business, to remain profitable they will likely have to raise the price of the goods or services they sell. The rate of increase in prices is what is known as inflation.
For the RBA to consider raising interest rates, they will first need to see unemployment lower than it is today. Currently unemployment stands at 4.6%, and whilst this is lower than the historical average, it does not tell the full story. Firstly, the participation rate (the number of people that are actively looking for work) has reduced and secondly, there is still relatively high under-employment (people working less hours than they would like). It will only be after these under-utilised workers and those not currently looking for work are employed that we will start to see a bidding war for labour and hence growth in wages.
This will not happen overnight, and the RBA have advised they are prepared to be patient. Their current forecast is that they expect inflation “to be no higher than 2½ per cent at the end of 2023” with “only a gradual increase in wages growth”. Whilst the RBA have removed the expectations specifically for the year 2024, their current commentary appears to indicate no increases to interest rates until after 2023.
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