Sydney - A senior policymaker at the Reserve Bank of Australia said on Thursday that the nation’s labour market has stabilised following a period of slowing activity and continues to be relatively tight, a pattern that is consistent with ongoing inflationary pressure in the economy.
Sarah Hunter, assistant governor at the RBA, said the central bank is monitoring labour market conditions closely to judge whether the recent rise in inflation is likely to be temporary. Speaking in Perth, Hunter noted the bank’s analytical frameworks point to a market that has recently steadied while remaining somewhat tight.
"Dynamics in the economy have evolved somewhat in recent months, and our full employment framework and NAIRU framework indicate that the labour market has stabilised recently and remains a bit tight," Hunter said in her prepared remarks. She added that, "The overall picture of persistent tightness is important because, like the entwined double helix, it is consistent with there still being some inflationary pressure in the economy."
The central bank raised its cash rate last week by a quarter point to 3.85%, effectively reversing one of the three cuts it enacted last year. Underlying inflation accelerated to 3.4% in the last quarter - the fastest pace in more than a year - and the RBA’s forecasts project inflation to reach 3.7% this year.
Officials at the RBA do not expect a significant easing in labour market conditions from the current level, and they anticipate inflation will remain above the bank’s 2%-3% target band for some time. That outlook underpinned Governor Michele Bullock’s warning on Thursday that further interest rate increases could be necessary if inflation risks becoming entrenched.
Recent data have underscored the view that the economy is operating with capacity constraints. A surprise decline in the unemployment rate to 4.1% in December - a seven-month low - suggested the labour market may be tightening again, the RBA said.
Hunter explained that the slowdown observed over the past few years has largely manifested through a drop in job vacancies, fewer workers seeking to change jobs and a slowdown in hiring activity by firms, rather than through a rise in unemployment. "Much of the slowdown over the last few years has been through a fall in job vacancies, fewer workers looking to change jobs and a slowdown in hiring by firms, rather than a rise in the unemployment rate," she said.
Those observations informed the RBA’s recent policy decision and its forward guidance: with labour market tightness persisting and underlying inflation picking up, the central bank is prepared to consider further rate action should inflation risks prove persistent.