RBA assistant governor Sarah Hunter warns high unemployment needed to lower inflation

Reserve Bank of Australia (RBA) assistant governor and chief economist Sarah Hunter warned that high unemployment may be needed to lower inflation and expectations.

In a speech to economists in Canberra on Wednesday, she said the bank’s focus on reining in inflation to the 2-3 per cent target helps keep people’s expectations realistic and minimise the risk of persistent inflation.

RBA Assistant Governor Sarah Hunter gave a speech in Canberra on Wednesday. Alex Ellinghausen

“If people expect the RBA to do what is necessary to keep inflation contained, inflation expectations are less likely to rise and so actual prices to change,” she said.

But if people try to predict the future based on past data, Hunter said, then their expectations may increase and it could be harder to bring down inflation.

“…We may need some period of low inflation and higher unemployment to bring expectations back down if they start drifting up,” she said.

Australia’s unemployment fell to 4.4 per cent in May, down from 4.5 per cent the previous month.

April’s figure was the highest unemployment rate since late 2021.

Australia’s unemployment rate remained strong in comparison to the rest of the world, with it sitting below the OECD average of 4.9 per cent.

The RBA held the cash rate steady at 4.35 per cent during its latest meeting in June, following three consecutive hikes, as it waits and sees whether inflation will ease.

Inflation unexpectedly slowed to 4 per cent in the 12 months to May, which was the lowest level in three months.

However, the trimmed mean – the RBA’s preferred measure of underlying inflation – rose by 0.2 per cent to 3.6 per cent.

Economists warned that there could be another rate hike as underlying inflation heads in the wrong direction.

An OECD report published on Tuesday also found that there are signs of labour market weakening through slow employment growth and one of the steepest declines in real hourly wages (about 5 per cent).

Economists and major banks have also forecast unemployment to approach 5 per cent over the coming year.

Hunter said the RBA would continue to work to bring inflation to target and maintain full employment.

“The board will continue to act as needed to ensure inflation returns to target and the labour market to sustainable full employment,” she said.