The new deputy governor of the Reserve Bank of Australia (RBA), 54-year-old former Bank of England official Andrew Hauser, has surprised me with an uncharacteristically honest appraisal of the bank’s current state of mind.
He says the RBA is following an agreement with Treasurer Jim Chalmers to “test” how low unemployment can be sustained, justifying lower interest rates than international rivals to control inflation.
In his first interview since becoming second-in-charge to governor Michele Bullock in February, Hauser claimed “inflation is too high”.
But Hauser used the RBA board’s December-amended formal agreement with Treasurer Jim Chalmers to explain the RBA’s 4.35% cash rate, which is lower than the US, New Zealand, Canada, and the UK.
“We have a dual mandate”, Hauser explained. “That was clarified and strengthened in the statement of the conduct of monetary policy last December”.
“I’m unapologetic about that. Could it go wrong? All central banks have to face uncertainty, but that is our strategy”, he said.
Hauser also noted that labour market researchers like Jeff Borland of the University of Melbourne believed full employment, or the non-accelerating inflation rate of unemployment, was a “lot lower” than previously thought.
The RBA currently estimates that full employment is sustainable in the low 4% range, down from 5% before the pandemic when inflation was below target.
This is sensible, given that with 5% unemployment and 2% immigration, Australians were unable to gain decent pay rises in the lost decade of the 2010s.
If you are going to run immigration near 2% then this is the cost, along with the capital shallowing and flatlining of productivity that lowers living standards.
The only other point I would make is that Hauser might have mentioned that Australia’s real mortgage rates are much higher than other developed markets owing to our floating rate structure.
This makes for a lower cash rate than comparable developed markets for the same degree of monetary tightening in most circumstances.
It is interesting to see the RBA suddenly unleashing the dovish jawbone of its new deputy.
It certainly isn’t hawkish.
