By Michael Pascoe
Not only is Australia's economic emergency over, we're very nearly back to normal, according the Reserve Bank Governor Glenn Stevens.
Of course a central banker wouldn't use a normal word like "normal", preferring to say "trend". And the trend is now our friend with the RBA judging that our major trading partners (not the US and Europe) and our good selves look like being "close to trend" through 2010.
And that's why the Reserve Bank has started lifting interest rates and will continue to do so – not because we've seen the peak in unemployment yet, but because the peak is in sight and will soon pass.
Effectively, the RBA has just sounded the all clear siren for Australia. The crisis is past, peace is at hand and it's therefore time to start taking off the combat gear.
The Governor's statement does indicate that he will gradually increase interest rates, so pencil in a series of 25 point rises as the emergency continues to recede.
But the "all-clear" siren doesn't mean all the pain is over. Credit remains constrained and "for many business borrowers, increases in risk margins will still be occurring for some time yet" – so the banks are still increasing their margins over and above the moves in official cash rates.
And unemployment will remain elevated, although that's something the RBA statement is rather vague about, just noting that unemployment has not risen as much as expected.
Which still leaves a thorny policy issue alluded to in the column filed earlier today that the RBA might not mind unemployment remaining elevated compared with what we became used to last year. Remember that Australia's unemployment rate over the past three decades averaged 7.2 per cent.
To recap, update and remove my prediction/hope that the RBA would wait and see for another month:
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 five 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, 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 are not supposed to slow our economic growth. If anything, the RBA would like us to see the first rate rise as a sign of confidence that better times are ahead.
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, one 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.
Michael Pascoe is a BusinessDay contributing editor.