The Reserve Bank of Australia’s (RBA) November Statement of Monetary Policy (SoMP), released on Tuesday, raised its forecast for the nation’s unemployment rate.
As illustrated below by Alex Joiner from IFM Investors, the RBA now expects the unemployment rate to rise from its current level of 4.6% (trend) to 5.1% by the end of 2028, up from 4.8% in the August SoMP:
Recent statements from senior RBA staff, most notably Deputy Governor Andrew Hauser and Assistant Governor (Economic) Sarah Hunter, suggested Australia’s unemployment rate would need to rise above 5% to tame inflation.
The November SoMP noted that “capacity pressures are now assessed to have been a little greater over the first half of the year than we thought at the time of the August Statement… Consistent with that, we have raised our assessment of the non-accelerating inflation rate of unemployment (NAIRU) a little. A higher NAIRU implies tighter labour market conditions for a given unemployment rate. As a result, despite actual unemployment having increased recently, we assess that the labour market remains a little tight, broadly as anticipated in August”…
The RBA’s modelled average Non-Accelerating Inflation Rate of Unemployment (NAIRU) – i.e., the lowest level of unemployment that an economy can sustain without causing wages and prices to rise faster than desired – is now estimated to be around 5% and “have moved higher in response to persistently elevated unit labour cost growth and inflation over recent years”:
“Accordingly, we are increasing our assessment of the NAIRU to around 4¾ per cent”, the November SoMP says. “Given this judgement, we continue to assess that the labour market is a little tight, despite the recent easing in a number of indicators”.
The upward revision of the NAIRU further confirms that the RBA is unperturbed by the recent rise in the unemployment rate and believes unemployment needs to rise above 5% to temper inflation.
