A prominent labour economist has called on the Reserve Bank of Australia (RBA) to adopt a more proactive stance on inflation, arguing that the recent decision to hold interest rates steady is merely delaying an inevitable adjustment. Professor Michael Dockery, from the Bankwest Curtin Economics Centre, expressed concern that the RBA’s current approach risks eroding public confidence in its ability to manage inflationary expectations.
RBA Holds Rates Amidst Persistent Inflation
The RBA’s board unanimously decided on August 11 to maintain the official cash rate at 4.35 percent. This decision came despite inflation figures remaining above the central bank’s preferred target range of 2 to 3 percent. In its statement, the RBA indicated that financial conditions were tightening due to earlier rate increases and that it intended to observe the effects before implementing further changes. The bank stated its commitment to taking necessary actions, including further rate hikes if upward risks to inflation materialise, to bring inflation sustainably back to its target.
However, Professor Dockery views this pause as a temporary measure. “Inflation has now been above the 2 to 3 per cent target range for a full year and the latest figures show no sign of domestic inflationary pressures easing,” he stated. He warned that the RBA’s repeated assurances of future action, without immediate steps, could lead to a loss of control over public expectations regarding future price increases.
Concerns Over Domestic Inflationary Pressures
Professor Dockery highlighted that while the RBA’s inflation forecasts for June this year were around 4.8 percent, the actual figure came in closer to 4 percent. He attributed this lower-than-expected outcome not to RBA policy effectiveness, but to external factors such as global trade tariffs and geopolitical conflicts in the Middle East, which had a less significant impact on oil prices than initially predicted. “That’s why those projections were really high, but the effects of the conflict haven’t been anywhere near what they thought it would be on oil prices, so that’s why (inflation) is under the forecasts,” he explained.
The economist argued that the RBA has historically been more decisive. “They’ve said they won’t hesitate to act, and they’ll do what it takes to get inflation back into the target range of 2 to 3 per cent,” he noted. “With the latest inflation figures, I felt things aren’t improving. I thought perhaps they did need to react – they can’t keep saying ‘we will act’ without actually doing it at some point.”
While improvements in the cost of imported goods (tradables) have offered some relief, Professor Dockery suggested this was largely due to fortunate external circumstances rather than deliberate RBA policy. He pointed to a concerning upward trend in the prices of domestically produced, non-tradable goods, indicating that internal inflationary pressures are intensifying. “Every indicator of underlying inflation got worse in the last figures, which I would have thought is a real concern. (The RBA) seem to have ignored that this time,” he observed.
The Risk of Entrenched Inflation and Credibility
A significant concern for Professor Dockery is the RBA’s projection that inflation will not return to the target range until mid-2027, despite it being above target for a year. He stressed the importance of the RBA maintaining its credibility, particularly in managing public expectations. “But now we’ve basically got inflation of 4 per cent that’s baked into a whole lot of things that will happen in the coming year,” he warned. This embedded inflation can influence various economic mechanisms, including wage indexation, welfare payment adjustments, and contractual agreements.
Implications for Households and the Economy
For ordinary Australians, the possibility of further interest rate rises looms, potentially placing significant strain on mortgage holders, especially those who have recently taken out loans. In the short term, consumers may face higher prices for essential goods like groceries. Looking further ahead, persistent inflation and the policies enacted to combat it could lead to a substantial increase in unemployment.
Professor Dockery expressed apprehension about the RBA’s perceived willingness to tolerate higher unemployment to curb inflation. “I have a feeling (the RBA) puts too much weight on inflation as opposed to unemployment, so the Reserve Bank is saying they’re happy for unemployment to go up if that’s what’s required to keep inflation down,” he stated. He acknowledged the RBA’s long-term objective of stable, low inflation but cautioned about the human cost of job losses and their impact on mental health.
The Housing Market’s Influence
The stability of the housing market is another critical factor influencing the RBA’s decisions, according to Professor Dockery. He suggested that a significant downturn in property prices could deter the RBA from raising rates further. A rapid decline in housing values could reduce household wealth, leading to decreased consumer spending and confidence, thereby naturally dampening demand in a way that an interest rate hike would aim to achieve.
The RBA’s next scheduled meeting to discuss monetary policy is set for late September, with an announcement on interest rates anticipated on September 29.
