MNI INTERVIEW: RBA To Hold Firm Amid Rising CPI, Unemployment

The Reserve Bank of Australia has little appetite to raise the cash rate and is likely to hold at 3.6% for an extended period, though it is likely to look through rising unemployment so long as it remains around the estimated 4.5% neutral level, a leading labour market economist and former Fair Work Commission board member told MNI.

While inflation remains the primary objective of the RBA’s dual mandate, the employment implications of further tightening might stay its hand, said Mark Wooden, emeritus professor at the University of Melbourne’s Melbourne Institute, adding that political pressure to avoid further rate increases also plays a role in its thinking. 

The RBA has already shown a willingness to tolerate a rate of price increases above the 2-3% target band, and even a 50-basis point rise in the Q4 trimmed-mean measure to around 3.5% would likely be insufficient to prompt a rate hike at the Feb 3 meeting, he said.

 “I think all evidence suggests they can do nothing, they should do nothing, because what matters is future inflation. If their models are telling them they're going to get back in range in 2027, then that's fine.”

The Australian Bureau of Statistics will release Q4 CPI results on Jan 28. Third-quarter trimmed mean increased 30bp to 3%, which was also 30bp higher than expectations. November's monthly trimmed mean was 3.2%, down 10bp from October. 

While markets have applied some pressure for a hike at the next meeting – pricing currently implies around a 30% chance of a 25bp increase and a cash rate of roughly 3.94% by year-end – Wooden said the RBA would only feel compelled to act if trimmed mean inflation moved decisively above 3.5% through Q2.

“If [trimmed mean] goes above that, then all bets are off… absent any shocks,” he said.

LABOUR MARKET DYNAMICS

Barring a global shock, Wooden said the labour market was likely to continue easing gradually toward the RBA’s implicit comfort point of around 4.5% unemployment.

So far the labour market has softened less than many had expected, he said, with joblessness drifting higher but employment growth remaining modest and conditions broadly stable rather than deteriorating sharply. Job vacancy and job ads data have become less reliable indicators given changes in hiring practices, he added, pointing to recent ANZ-Indeed Job Advertisements which fell 0.5% in November. 

Wooden said the RBA and Treasury had been more optimistic than some private-sector commentators, and recent outcomes had largely validated that view. An unemployment rate rising toward 4.5% would not trouble the Bank, he said, as holding joblessness closer to 4% without reigniting inflation had proven difficult.

The RBA expects unemployment to hit 4.4% by December 2025 and then remain around that level over the forecast period. The ABS will update its jobs data on Jan 22.

Employment growth is likely to remain concentrated in sectors heavily reliant on public funding, including health, aged care and childcare, where labour demand remains strong and constraints are imposed by worker availability and skill requirements, Wooden said. In contrast, manufacturing employment is likely to continue its gradual decline, even as government support for renewable energy and related initiatives expands.

The outlook, however, remains contingent on global developments, he cautioned, noting that unexpected external shocks could quickly alter both inflation and labour market trajectories. If unemployment moved rapidly towards 5%, then the RBA would swiftly shift to considering cuts over hikes, he concluded.