As we approach the end of 2022, Australia’s economic outlook is clouded with uncertainty. The immediate threat of COVID-19 is behind us, with the development of vaccines, and the easing of lockdowns and restrictions. The Reserve Bank of Australia’s (RBA’s) monetary policy response to the pandemic played a critical role in reducing the economic and financial disruptions of the virus by lowering funding costs and supplying a line of credit to the economy. Central to the RBA’s response was reducing the official cash rate to 0.1 per cent. This boosted the cash flow of businesses and the household sector and assisted trade-exposed industries through the exchange rate.
It was anticipated that the pandemic would have long-term damaging effects on the economy, and that it would take years to recover. However, the Australian economy has proved resilient and the fiscal and monetary policy responses to the pandemic have fuelled strong demand and boosted household savings. Those positive signs were quickly overshadowed though by a deteriorating global outlook, and continued instability and disruption in energy markets and global supply chains.
As a result, the rate of inflation in Australia—which in February only reached the midpoint of the target band for the first time in seven years—is now suddenly at rates not experienced since 1990. This rapid rate of inflation, which was not forecasted by the RBA or other central banks, has serious ramifications for the economy and Australian households. It hinders sustainable economic growth, reduces spending power, and discourages spending and investment.
Between May and November 2022, the RBA has lifted the cash rate from 0.1 per cent to 2.85 per cent. With seven consecutive increases to interest rates—and more anticipated to come—rising interest rates are adding pressure to households already experiencing inflation and cost-of-living increases.
At the same time, the Australian economy is showing good signs in some areas. We have the lowest unemployment rate in almost 50 years at 3 ½ per cent. This, along with increases in labour force participation from women and young people, is a major achievement and demonstrates that the economy still has strong prospects. However, it is also evident that even with such low unemployment rates, labour shortages are being felt across multiple industries, with record high job vacancies demonstrating the difficulty for businesses in finding workers.
The Reserve Bank is not solely responsible for bringing down inflation and dampening demand in the economy. The community’s and business sector’s expectations about inflation also influence actual inflation levels. Thus it is vital that the Reserve Bank carefully factors these expectations into both its consideration of rates and its signalling of monetary policy settings to the public.
Bringing down inflation to manageable levels without pushing the economy into a recession will be a central challenge for the RBA in the coming months and years. With inflation not expected to return to within the target range until 2024, transparency in the RBA’s monetary policy decision-making will be paramount. In 2023, the committee will also scrutinise particularly closely the RBA’s response to the independent review of the bank, which is scheduled to report to the government in March. The committee takes its responsibility to hold the RBA to account before the Australian parliament and its people very seriously and looks forward to further hearings next year.
On behalf of the committee, I thank the Governor of the Reserve Bank, Mr Philip Lowe, and other representatives of the RBA for appearing at the hearing on 16 September 2022.