MNI INTERVIEW: More Hikes As RBA Softens Labour Stance

The Reserve Bank of Australia will likely need to raise the cash rate from 4.35% at least once more to return inflation to its 2.5% midpoint by mid-2028 in line with its most recent projections, a former senior RBA economist told MNI, noting the RBA had softened its language around protecting labour market gains. 

John Simon, who led the Bank’s economic research department from 2014 to 2024, said the policy outlook implied rates would need to move higher again even after this week’s increase, though the timing would depend on incoming data and the Bank’s assessment of domestic and global shocks. (See MNI RBA WATCH: 8-1 To Hike; Inflation-Growth Equation Worsens) The next move could come as soon as the August meeting, when policymakers would have a clearer read on federal and state budgets, Fair Work Commission wage decisions and ongoing union-led bargaining outcomes, he added.

“Because [the cash rate] is now somewhat restrictive, they have finally got to a place where they could pause,” Simon said, adding that further tightening would depend on how inflation dynamics evolved. 

The Bank's expectation of zero productivity growth over the June quarter was also a meaningful change, he said, noting the revision from earlier assumptions had increased underlying inflation pressure in the Bank’s framework. “They’ve become a little more balanced, but not wildly so.”

The RBA framed this week's hike in part as a response to global oil market disruptions, though Simon said domestic inflation pressures remained central to the decision. The Bank was now operating in a “somewhat restrictive” setting with respect to domestic demand, but still faced a difficult trade-off between maintaining labour market strength and re-anchoring inflation expectations, he continued.

POLICY PATH

Simon said the Bank's policy path could either involve a faster tightening cycle or a more extended period of higher rates. “Both are more or less equivalent at the end of the day, except maybe for the effect you have on inflation expectations,” he argued, noting Governor Michele Bullock's recent comments suggested a shift in emphasis away from prioritising labour market outcomes, and a stronger focus on inflation risks.

"In the February meeting, she really spelt out that she believed they could bring inflation down without a negative output gap, which I found quite a surprising claim," he said, noting a similar sentiment had appeared at the April meeting. "There was a question about equal weight [between labour and inflation], which she backed away from, or at least, wasn't quite as gung ho about unemployment as she has been in the past."

The shift is a positive from an inflation credibility perspective, noted Simon, who has been a vocal critic of the RBA's strategy over the last two years. (See MNI INTERVIEW: RBA Strategy Risks Failure - Ex Chief Economist)

OIL SHOCK 

The Bank’s response to the recent oil shock would depend on whether it proved temporary or fed into broader price-setting behaviour. If supply shocks remain contained, he said, the Bank would likely “look through” their direct impact, but would be forced to respond if inflation expectations or underlying inflation begin to drift higher.

However, the full impact of higher energy prices have yet to flow through the economy, he warned, adding past policy missteps left limited buffers to absorb further shocks. “The oil crisis really hasn’t hit yet ... They’re still fixing up their issues from last year, and then you lay the oil shock on top of that.”

The combination of elevated inflation, revised productivity assumptions and still-strong wage pressures suggest the RBA remains vulnerable to upside inflation surprises, particularly if expectations begin to de-anchor, he concluded.