ANZ economists have suggested that interest rates could potentially be lower without causing an outbreak of inflation, bringing positive news for home borrowers and employed individuals. This is based on the concept of the “non-accelerating inflation rate of unemployment” (NAIRU), also known as the natural rate of unemployment, which is the level of unemployment above which inflation is expected to slow. The RBA has traditionally estimated Australia’s NAIRU to be around 4.5 per cent, but recent data suggests that it may be lower, possibly closer to 3.75 per cent. This could mean that the economy has room to grow at a faster pace without leading to a surge in inflation.
The unemployment rate, currently at 4.1 per cent as per recent data, is expected to reach 4.5 per cent by the end of next year, according to the RBA. Despite this slight increase, the ANZ economists argue that the economy could sustain a lower unemployment rate, potentially around or below 4 per cent, without triggering inflation. This is supported by the recent trend of easing wage growth, which has dropped to 3.5 per cent from a peak of 4.1 per cent last year. The slowdown in wages growth across different employment sectors indicates a broad-based deceleration, which could allow for a slightly faster economic growth without spurring inflation.
Central banks, including the RBA, use the NAIRU as a key factor in determining appropriate interest rates to maintain stable inflation levels. The concept suggests that when unemployment falls below the natural rate, businesses may offer higher wages to attract workers in a tight labor market, leading to inflation pressures. However, the ANZ economists believe that the current environment of subdued wage growth indicates that there is room for the unemployment rate to be lower than previously estimated without causing a significant increase in inflation. This could potentially allow for lower interest rates, benefiting home borrowers and people with jobs.
The estimate of the NAIRU is not static and can change over time based on various economic factors. While it is not known in real-time, central banks and economists make estimates with a certain degree of lag. The RBA’s estimate of 4.5 per cent as Australia’s natural unemployment rate has been in place for several years, but recent trends in wage growth and unemployment suggest that the actual rate may be lower. With unemployment averaging 4 per cent over the past year and wages slowing, the ANZ economists argue that full employment could be consistent with an unemployment rate at or below 4 per cent, potentially even closer to 3.75 per cent.
The positive outlook presented by the ANZ economists is based on the current economic indicators, such as the gradual slowdown in wage growth and the stable unemployment rate. These factors suggest that the economy may be able to sustain a lower unemployment rate without causing inflation to surge. This could allow for the RBA to consider lowering interest rates, providing relief for home borrowers and boosting economic growth. The concept of the NAIRU remains a key factor in monetary policy decisions, and any adjustments to the estimated natural rate of unemployment could have significant implications for future interest rate movements and inflation trends.
In conclusion, the ANZ economists’ analysis offers a more optimistic perspective on the potential for lower interest rates without sparking inflationary pressures. This could be particularly beneficial for home borrowers and individuals with jobs, as it suggests that the economy may have more room to grow without overheating. The evolving nature of the NAIRU and the current economic trends point towards a scenario where the unemployment rate could be lower than previously estimated, supporting the argument for lower interest rates. This positive outlook could pave the way for a more accommodative monetary policy stance, helping to sustain economic growth and stability in the future.
