Australia’s Economic Outlook Hidden from View

The Reserve Bank of Australia’s independence means a struggle over the country’s economic outlook is being fought in the shadows.

The government has passed major changes to the Reserve Bank Act, which will now have a second board solely responsible for setting interest rates. This move is seen as an attempt to influence the bank’s decisions on interest rates before the election.

Some financial institutions and economists have questioned the RBA’s economic assessment, particularly regarding the state of the labour market. The NAIRU (Non-Accelerating Inflation Rate of Unemployment) estimate differs among experts, with some arguing that it is too high, leading to overestimation of wages growth and inflation sustainably within the 2-3 per cent target band.

The RBA’s estimate of the NAIRU is that it sits at 4.5 per cent or higher. Treasury’s estimate is 4.25 per cent, while Borland puts it at 4 per cent and the ANZ at 3.75 per cent.

Key Points

• The Reserve Bank Act has been amended to include a second board solely responsible for setting interest rates

• This change is seen as an attempt by the government to influence the bank’s decisions on interest rates before the election

• Experts have questioned the RBA’s economic assessment, particularly regarding the state of the labour market

NAIRU Estimate Disagreements

• The RBA estimates the NAIRU (Non-Accelerating Inflation Rate of Unemployment) at 4.5% or higher

• Treasury estimates it at 4.25%, while Borland and ANZ put it at 4% and 3.75% respectively

• Some experts argue that the RBA’s estimate is too high, leading to overestimation of wages growth and inflation sustainably within the 2-3% target band

The ANZ’s underlying assessment is that given the “NAIRU is likely around 3.75 per cent, wages growth should undershoot the RBA’s expectations.”

The CBA’s head of Australian economics, Gareth Aird, wrote last week that “the most recent wages data suggests [the RBA’s NAIRU] estimate is too high.” He says for the RBA’s wage forecast to be achieved, “the quarterly pace of wages growth would need to accelerate to 1 per cent [per quarter in the final quarter of 2024].”