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Resilient labour market undermining inflation battle: RBA

By Charbel Kadib
3 minute read

Labour market conditions are “inconsistent” with the central bank’s inflation target, the deputy governor has said following an unexpected decline to the unemployment rate.

In an address to the Ai Group on Tuesday (20 June), deputy governor of the Reserve Bank of Australia (RBA) Michelle Bullock unpacked the central bank’s assessment of the labour market amid the ongoing fight to quell inflation.

Ms Bullock stressed the importance of preserving recent gains in the labour market, with the unemployment rate currently sitting at a near-record-low of 3.6 per cent.

However, the deputy governor claimed the strength of the labour market is “inconsistent” with the RBA’s objective of returning inflation to its target range of 2–3 per cent.


“Our assessment is that, for the first time in decades, firms’ demand for labour exceeds the amount of labour that people are willing and able to supply,” she said.

“That is, employment is above what we would consider to be consistent with our inflation target.”

As such, the labour market would need to soften to achieve the central bank’s primary disinflation objective.

“As the bank has highlighted frequently over the past year, high inflation makes life difficult for people and damages the functioning of the economy,” Ms Bullock observed.

“It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality. That is why the board has been increasing the cash rate.”

The deputy governor revealed, ultimately, the central bank aims to “return the labour market” to full employment or 4.5 per cent — the “endpoint” of the RBA’s forecasts for the unemployment rate.

“We think this can be achieved if employment and the economy more generally grow at a below trend pace for a while,” she added.

“This would help to bring demand and supply into better balance and give us the greatest chance of securing sustainable full employment into the future.”

Ms Bullock’s remarks come just a week after the latest labour market statistics reported a reduction to the unemployment rate, from 3.7 per cent in April to 3.6 per cent in May.

The May result took markets by surprise, with observers, including two of the major banks (Commonwealth Bank and Westpac) anticipating no change.

An additional 75,900 Australians entered the labour market in May, the ABS data revealed, supporting an increase to the participation rate to 66.9 per cent.

However, the underemployment rate increased by 0.2 percentage points to 6.4 per cent.