The RBA’s policy settings seem to depend on wishful thinking.
They are hoping that nominal wage growth remains moderate, despite repeated experience of rapid acceleration when the labour market was less tight than it is now.
They are hoping that inflation expectations remain anchored – despite several years of inflation exceeding its target. At some point price and wage setters will start to look at the data and question the RBA’s infallibility.
They are hoping that huge increases in advertised rents do not flow through to paid rents.
They are hoping that supply blockages quickly disappear.
All these risks are asymmetric, with the RBA banking on everything going right. They are not balancing the risks.
They want to avoid an increase in unemployment, which is understandable. But the choice is between a small increase in unemployment now, from a position of overheating when it is bearable; or the risk of a much larger increase later if higher inflation becomes entrenched.
Updated: 21 March 2023/Responsible Officer: Crawford Engagement/Page Contact: CAMA admin