Reserve Bank Says Unemployment Rise Was Not A Shock, Inflation On Track

(MENAFN- The Conversation) 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.

In a speech today to the Anika Foundation , Bullock said there has been:

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:

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:

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.

Reserve Bank Governor Michele Bullock prepares to address business economists in Sydney. Jane Dempster/AAP 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:

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:

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 :

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.

Read more: Australia's inflation rate is to go monthly. Be careful what you wish for

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