MNI POLICY: RBA Sees Risk That NAIRU Slightly Lower Than 4.5%

Internal analysis of recent economic data suggests the non-accelerating inflation rate of unemployment (NAIRU) may be 10-20 basis points below the Reserve Bank of Australia’s 4.5% estimate, which is based on model outputs likely distorted by the pandemic years, MNI understands.

While models point to a NAIRU of 4.5%, the Bank’s assessment of data indicates it could be closer to 4.3-4.4%. Relying solely on model outputs would have implied a slightly higher price outlook than the current forecast, which sees trimmed-mean inflation at 2.6% by the December quarter. (See MNI RBA WATCH: Bullock Points Toward Further Cuts)

Pandemic effects had prompted officials to apply some judgement to recent employment forecasts, and officials had recognised a lower NAIRU as a key risk within the Bank’s latest projections. The RBA has also acknowledged that its ability to estimate NAIRU accurately declines as the economy nears balance, and is placing greater weight on direct data analysis and judgement.

Former staffers have called on the RBA to revise its NAIRU estimate lower for some time. (See MNI: Ex-RBA Economists Tip Two Cuts On Tight Labour Outlook)

DATA JUDGEMENTS

Australia’s unemployment rate stood at 4.2% in August. The 4.5% NAIRU estimate remains broadly consistent with the steady decline in trimmed-mean inflation and moderation in wage growth over the past year, which has limited the case for revising it lower.

The RBA applies transparency protocols to its use of judgement, recording and communicating adjustments across departments. While there is no fixed rule for when judgements override model outputs, officials stress data-driven analysis as the starting point, supplemented by a suite of models weighted differently across variables.