By Michael Pascoe
In March last year when the Reserve Bank last increased interest rates, the latest available trend figure for unemployment was 4.2 per cent. Arguably, the RBA judged Australia couldn't handle unemployment that low and acted to slow the economy, a move that inevitably increases the unemployment rate.
And that begs the question of just where the jobs pain threshold is for our central bank – the dreaded NAIRU, the non-accelerating inflation rate of unemployment. With present productivity levels, it's probably somewhere much closer to 5 per cent than four.
As events far beyond the RBA's control unfolded last year, the NAIRU had little to do with monetary policy. It was a year ago this week that the RBA board dramatically slashed the cash rate by an extraordinary 100 points to 6 per cent after first trimming rates 25 points at its September meeting. At the September 2008 meeting, the latest unemployment rate was still just 4.3 per cent. At the October lunch, it was back to 4.2.
As the board meets today to consider whether the crisis is over and therefore if rates should start to increase from the present "emergency" level of 3 per cent, the latest unemployment rate is 5.8 per cent. It looks like NAIRU won't be the key factor in the next rate rise then either.
The RBA has been careful to broadcast the message that the first few rate rises of 25 points – whether they start today or on Melbourne Cup Day or arrive as a December Christmas present – are not supposed to slow our subdued economic growth. If anything, the RBA would like us to see the first rate rise as a sign of confidence and better times ahead, an "all clear" siren that the worst is over.
It will still attract plenty of criticism from those whose first priority is the headlines that rising unemployment rates create. Somewhere further down the track though, the uncomfortable NAIRU question will have to be faced.
It's a bit of a shame that the RBA board meets before Thursday's September labour market figures are released. As long as the labour market is deteriorating, there's a good argument that inflation is weakening. As has been observed before, while employment is a lagging economic indicator, it's a leading inflation indicator.
While yesterday's trio of job ad surveys and the unofficial Roy Morgan poll all indicate employment is improving, the consensus expectation is still for unemployment to nudge up over 6 per cent in coming months. And that makes it hard for the RBA to appear too tough and heartless by lifting rates.
But if we're only, say, 1 per cent above our NAIRU anyway with economic hotspots again breaking out thanks to our skills shortage, a pre-emptive move to at least start to bring the cash rate back closer to neutral becomes more desirable.
For what it's worth in the league of tipsters, if I was a betting man, I'd wager that the RBA won't lift rates today. There are enough uncertainties for the RBA board to want to wait and see – the recent more realistic appraisals of the US economy and the question marks over the immediate strength of Chinese commodities demand. Let Wall Street get its October nerves out of the way - I don't think anyone's seriously suggesting waiting a month will do any damage.
But I admit to not being much of a punter anyway. And on the other hand, the RBA's insider knowledge of retail sales in September should be that it was another reasonable month on top of August, exports are holding up and the Australian emergency is over – it's just the state of the rest of the developed world that remains fragile.
Michael Pascoe is a BusinessDay contributing editor.