A standout issue for the RBA over the 15 years of modern monetary policy management is that it has never hiked interest rates when the unemployment rate has been above 5.7 per cent.
This begs the question about monetary policy considerations now, with the speculation about an RBA rate hike. These views are a little strange, not just because the current unemployment rate is 5.9 per cent, but because inflation is currently below the bottom of the target band, wages growth is at a record low and bottom line GDP is still some way below trend.
Indeed, just three of the last 17 rate hikes have occurred with unemployment at 5.6 per cent or 5.7 per cent; a further four rate hikes have occurred with unemployment at 5.3 to 5.5 per cent; a further three with unemployment at 5.0 to 5.2 per cent with the remaining seven hikes delivered with an unemployment rate at 4.9 per cent or lower.
This no doubt reflects the RBA judgment that the unemployment rate associated with full employment and the risk of rising inflation is around 5 per cent. If the economy is growing strongly and the unemployment rate is on track to hit or even break below 5 per cent, inflation risks are building and with the, tighter monetary policy in the form of interest rates hikes are needed.
It is a strategy that has, on balance, worked well.
For now, there seems little chance for the unemployment rate heading to 5 per cent. On Thursday, there will be the regular monthly update on the labour force which will provide an update on employment and the unemployment rate. It needs to be a strong result for there to be any credibility in the interest rate hike forecasts. If not, it seems likely that rates will be on hold a lot longer and if there is a move in the unemployment rate to 6 per cent, or higher, the RBA and market will soon change its tune and an interest rate cut will be on the agenda.