Importantly, this ultra low unemployment rate and solid wages growth fed into underlying inflation which was above 3 per cent for two years. It was around 3.5 per cent as the first rate hike of that cycle was delivered.
At that time and with hindsight, it was quite obvious that higher interest rates and tighter monetary policy was needed to reign in inflation pressures which had been stubbornly high. In a nutshell, the economy was strong, with low unemployment, solid wage growth and inflation was uncomfortably high.
Fast forward to today. Let’s now look at the economic fundamentals the RBA will be confronted with as it considers what to do with interest rates.
Now, the unemployment rate is hovering around 5.6 to 5.7 per cent, a full 1.5 percentage points above the rate when the last interest rate tightening cycle started. Annual wages growth is currently at a record low, running at 1.9 per cent, almost half the rate in 2009. A critical point now is the underlying inflation rate. It has been below the bottom of the RBA target band for two years and last week, it was confirmed at 1.8 per cent to be about half the rate at the time of the start of the last interest rate tightening cycle.
For an interest rate hiking cycle to start, inflation needs to pick up to at least 2.5 per cent, while wages growth needs to lift to 3 per cent. This implies the unemployment rate needs to drop to 5 per cent or less and which on even the most optimistic forecasts, seems more a wish that a robust expectations of labour market conditions.
Until these sorts of readings for the economy come to pass, the RBA will not lift interest rates. Indeed, if there is any evidence of low wages growth and low inflation continuing near current levels, the RBA will cut interest rates to a fresh record low.
In the mean time, keep an eye on the data on wages, inflation and unemployment to work out when, and in what direction, the RBA will next move rates.