Australia’s central bank to shape monetary policy on labour market changes

Australia’s central bank has announced a shift in its monetary policy, stating that it will focus on labour market changes rather than price changes across the economy. 

“In the past, our forward guidance about interest rates was forward looking – we have focused on the outlook, or forecast, for inflation. This was a sensible approach when the inflation dynamics were stable and predictable,” said Philip Lowe, Governor of the Reserve Bank of Australia at the annual dinner for the Committee for Economic Development of Australia.

“But the combination of globalisation and technology and now the pandemic have changed these dynamics. Labour markets are working differently than they used to and, wage and inflation dynamics have changed. This has made relying on forecasts more difficult,” he said.

Lowe added: “Given this, we have now moved to place much more weight on actual outcomes, rather than forecast outcomes, in our decision-making and in our forward guidance.”

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The central bank will focus on supporting the economy and jobs, promoting economic growth until recovery is assured. This focus will remain until the unemployment rate is below 6%, Lowe said. 

The governor believes that “the challenge facing Australia over the next few years is much more likely to be the creation of jobs, rather than controlling inflation pressures”.