ANZ economists have released a research note suggesting that interest rates could be lower without leading to an outbreak of inflation. The unemployment rate at which inflation is thought to increase may be lower than what the Reserve Bank of Australia (RBA) has been assuming. The RBA sets interest rates partly based on the concept of the “non-accelerating inflation rate of unemployment” (NAIRU), also known as the “natural rate” of unemployment. When the jobless rate is above the NAIRU, inflation slows, and below it, inflation pressures build as businesses offer higher wages to attract employees.
The RBA has estimated Australia’s natural unemployment rate to be around 4.5 per cent for several years. Currently, the unemployment rate is at 4.1 per cent, with projections to increase to 4.5 per cent by the end of next year. However, recent figures have shown a slowdown in wage growth, dropping to 3.5 per cent after peaking at 4.1 per cent last year. The ANZ economists believe that with the easing of wage growth, the economy could potentially grow faster without triggering inflation.
The ANZ’s economics team highlighted that wage growth has slowed across various sectors, including awards, enterprise bargaining agreements, and individual arrangements. This indicates a broad-based deceleration in wages. Additionally, with the unemployment rate averaging 4 per cent over the past year, it suggests that full employment may be achievable with an unemployment rate at or below 4 per cent. The economists also suggested that considering the lag between the unemployment rate and wage trends, the “natural rate” of unemployment could be closer to 3.75 per cent.
While the RBA has historically estimated Australia’s NAIRU to be around 4.5 per cent, recent economic indicators have shown a different picture. The ANZ economists’ research note points to the potential for a lower NAIRU, indicating that interest rates could be lower without sparking inflation. As the economy continues to navigate through wage trends and unemployment rates, the possibility of achieving full employment with a lower unemployment rate is a positive development for borrowers and employed individuals.
In conclusion, the research note from ANZ economists provides a hopeful outlook for home borrowers and people with jobs. The suggestion of a lower natural rate of unemployment could allow for lower interest rates without causing inflation to rise significantly. With wage growth easing and the unemployment rate remaining stable, there is potential for the economy to grow at a quicker pace without leading to inflationary pressures. This insight into the evolving economic landscape offers a positive perspective on the potential future trajectory of interest rates and inflation in Australia.
