Harsher interest rate hikes in 2022 and 2023 would have cut inflation sooner but at the cost of more than 100,000 jobs, the Reserve Bank has revealed.
The RBA lifted the cash rate 13 times in an 18-month period starting in May 2022 in a desperate bid to contain the post-pandemic cost of living crisis.
Yet even that aggressive tightening cycles was soft by international standards.
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RBA assistant governor Sarah Hunter on Monday night revealed the RBA’s projections showing just how different the economic picture would be with more dramatic hikes and cuts over the past four years.
She told a conference in Norway that inflation would have hit the middle of the RBA’s target band at the start of 2025.
Yet the cost of living respite would have been brief, Dr Hunter said, as the economic recovery last year would have nonetheless pushed inflation back above target.
The unemployment rate would have hit 5.3 per cent late last year — effectively adding almost 200,000 Aussies to the jobless queue.
“Unsurprisingly, a sharper increase in interest rates would have reduced the peak level of inflation and increased the speed of subsequent disinflation,” she said at the Norges Bank Monetary Policy Mandate Conference in Oslo.
“But the more contractionary policy path would have caused higher unemployment.”
Dr Hunter said the strategy relied on inflation expectations remaining anchored.
“When the economy is operating beyond what is sustainable, there is no unique path for policy to rebalance the economy,” she said.
The RBA was nonetheless forced to lift the official cash rate in February after activity was stronger than expected and inflation surged beyond the target band.
That’s led to questions as to whether the central bank was too quick to cut rates in 2025.
Markets predict an 88 per cent chance of another hike by June.
Governor Michele Bullock last week declared she was confident inflation “won’t take off again” and the RBA’s move was less clear.
