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The RBA explained: what we get wrong about the Reserve Bank

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The RBA explained: what we get wrong about the Reserve Bank

 

UNSW Sydney

How much does the public really understand about the role of the Reserve Bank of Australia? What is the role of a central bank and how much of the current economic turbulence have its policies and decisions caused – or prevented?

Amid surging interest rates and strong criticism of the outgoing Governor, Philip Lowe, the RBA has been under intense scrutiny. The incoming governor, Michele Bullock, faces acute pressure to ease the pain of higher interest rates for borrowers while constraining inflation.

The RBA’s interbank overnight cash rate target, the major influencer of retail interest rates, has surged from 0.1 per cent in April 2022 to 4.1 per cent in July 2023 and the Reserve’s recent announcement predicts an increase in Australia’s unemployment rate to 4.5 per cent by the end of next year. Large sections of the public believe it is the RBA’s responsibility to act.

In an interview, Dr Nalini Prasad, School of Economics, and Associate Professor, Mark Humphrey-Jenner, School of Banking and Finance at UNSW Business School, explore the RBA’s role.

What is the RBA? 

A/Prof. Mark Humphrey: The RBA is Australia’s “central bank”. The RBA has several roles, with the primary one being price stability. This involves ensuring that inflation is neither too high nor too low, usually sitting between 2 per cent and 3 per cent.

Part of the RBA’s role is to implement its inflation-related goals through monetary policy meetings, the most common aspects of which include setting the interbank overnight cash rate, cash rate for short, and quantitative easing or tightening (i.e., buying or selling bonds in the market). This sets the rate at which banks are willing to lend to households and businesses in the economy.

What impact does the RBA have on the cost of living crisis?  

A/Prof. Mark Humphrey: The RBA has a complex impact on the cost of living and might initially be seen to worsen it through higher rates. This is to reduce inflation and ease cost-of-living pressures. The aim is for this to be short-term pain for long-term gain.

Raising rates certainly increases the cost of servicing mortgages. It is often asserted that this increases rents. This is because higher rates deter construction. They also increase demand for rentals because it becomes more difficult to convince a bank you can service a loan. Thus, it can increase rental demand and decrease rental supply. The ultimate beneficiary here is the bank not the landlord, assuming the bank does not see defaults increase at least. The goal is to reduce overall spending, thereby reducing inflation.

In addition, corporations might face funding pressures as well: as capital becomes more expensive, companies will be able to borrow less, or will have to do so at less favourable terms. This slows their expenditure, which in turn should reduce inflation.

The RBA may worsen the cost of living situation for some people if unemployment increases markedly. For the impacted people, the cost of living will become significantly worse if they cannot find another job. However, the RBA is aware of this and aims to reduce such impacts as far as possible.

What impact does RBA have on homeowners? 

Dr Nalini Prasad: The main way in which interest rates affect the economy is through the behaviour of people with a mortgage. When the RBA increases interest rates this increases individuals’ mortgage interest rates for those people on a variable mortgage. Individuals’ mortgage payments rise, leaving them with less money to spend on other things.

When individuals have less money to spend on other things, this reduces demand in the economy and should put downward pressure on prices. What’s interesting about the current period is that around 40 per cent of borrowers took out fixed rate mortgages during the COVID-19 period. These individuals took out loans with interest rates between 2 to 2.5 per cent which were fixed for around three years.

A lot of these fixed rate mortgages are now expiring, and these individuals are having to refinance onto home loans with interest rates between 5 to 6 per cent. This is equivalent to an $650 increase in monthly repayments for the median borrower. There are concerns that these individuals will have to cut back their consumption to meet higher interest payments on their loan. Offsetting this, households built up large savings buffers during the COVID period – this could help households meet increased interest payments without a large reduction in their spending.

What are some common misconceptions about the role and actions of the RBA? 

Dr Nalini Prasad: There is a common misconception about the RBA and thinking they do not care about the public. When interest rates were low, the RBA was criticised for lowering the incomes of retirees. When interest rates are rising, like they are now, the RBA is criticised for increasing pain on mortgage holders.

The people who work at the RBA have parents or grandparents that are retirees, and many of them also have a mortgage. They understand that changing interest rates affect segments of society differently but are trying to balance all these things to keep inflation low and ensure that everyone who wants a job is able to find one.

The RBA puts a lot of thought and analysis into the decisions it makes.

A/Prof. Mark Humphrey: It is sometimes claimed that the RBA controls or influences property prices or intends to do so. This is not correct. The RBA does not specifically aim to increase or decrease house prices. House prices derive from a complex mix of supply and demand dynamics.

In addition, there are some assertions that the RBA is the only body responsible for controlling inflation. This is false. The RBA only controls monetary policy (i.e., the RBA policy interest rate). The federal government controls fiscal policy (i.e., government spending). If the government spends profligately, the RBA must then struggle to undo the damage done by the government.

How does the RBA envision the future of the Australian economy? 

Dr Nalini Prasad: The RBA has indicated that it is likely to pause increasing interest rates to assess how previous interest rate increases have affected the economy. However, it’s hard to see how interest rate increases will stop while the inflation rate remains above that of the cash rate. The unemployment rate is also at historic lows which will concern the RBA as employers increase wages in order to attract staff.

The RBA will face a number of challenges besides dealing with inflation. The review into the RBA recommended changes to how the RBA operates. Some of these things will be straightforward to implement, others will be more challenging, like changing the structure of the board and allowing them to request information from RBA staff.

 

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Workforce barriers tripping up young Australians and how to overcome them

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Workforce barriers tripping up young Australians and how to overcome them

 

Only half of young people feel confident in achieving their current or future career aspirations due to workforce barriers, new research has found.

This, coupled with a youth unemployment rate of 9.7% as of May 20242, underscores the critical need for targeted support and resources to equip young individuals with the foundational skills essential for navigating today’s complex job market.

For young people, particularly those from marginalised groups like Indigenous youth and women, there are additional barriers that exacerbate the challenge in securing employment and advancing careers including things like systemic inequities, limited access to quality education and training as well as pervasive social biases.

For example, recent studies have shown that 37% of women working in predominantly male environments report experiencing gender-based competence challenges3.

Employment services provider atWork Australia is addressing these challenges head-on by spotlighting the empowerment of young talent in preparation for World Youth Skills Day on 15 July, providing comprehensive support to young individuals, ensuring they have the necessary skills and assistance to confidently enter the workforce.

Over the last year, atWork Australia has supported over 7,300 young people (aged 25 years or younger) on their individual employment journey across metropolitan and regional Australia. Trends show that hospitality, warehousing and retail are the most appealing industries for young people to seek out. atWork Australia celebrates and applauds youth transition to all industries as each individual embarks on their employment and career journey.

One inspiring example is atWork Australia client, 18-year-old Yasmine, a determined Indigenous young woman from Mount Druitt, New South Wales. Through atWork Australia’s guidance, Yasmine defied odds and successfully entered the traditionally male-dominated mechanical industry.

Yasmine’s journey, starting from when she left school in Year 10, it reflects her resilience in overcoming significant challenges. Initial barriers included securing additional work hours and attending appointments due to financial constraints. Yasmine found crucial support from atWork Australia for emotional, mental and educational barriers as well as practical needs like food vouchers and travel costs4.

“atWork Australia has been a tremendous support for me,” Yasmine shared. “They kept me informed about job opportunities and reached out to discuss potential roles. It was empowering to be able to communicate my interests and preferences directly to them.”

Navigating her way through interviews and her initial week on the job, Yasmine benefitted from the guidance of atWork Australia’s Indigenous Connections team, who provided essential mentorship and support.

Despite encountering scepticism and doubts as a woman in a male-dominated field, Yasmine persevered, impressing her colleagues with her skills and determination.

“At 18, there were moments of self-doubt, especially being an 18-year-old female in this industry, but with atWork Australia’s unwavering support, I gained confidence and pushed through,” Yasmine reflected.

atWork Australia will continue to assist Yasmine until she feels fully settled in her new role and is committed to supporting her journey towards achieving her long-term goal of saving for a house deposit.

Yasmine’s story exemplifies the transformative impact of tailored support and mentorship in empowering young individuals to thrive in challenging environments.

atWork Australia is dedicated to providing comprehensive support to young individuals, ensuring they have the necessary skills and assistance to confidently enter the workforce.

To find out more about atWork Australia’s support services, please visit: www.atworkaustralia.com.au. Additionally, you can listen to any of the podcasts from the ‘Candid Conversations with Shaun Pianta’ podcast series here where atWork Australia Brand Ambassador and Paralympian, Shaun Pianta, speaks about his employment journey, following a life-changing holiday.

 

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Scrap Metal Company and Directors Fined for Mass Limit Breaches

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Scrap Metal Company and Directors Fined for Mass Limit Breaches

 

A Melbourne-based scrap metal company and its three directors have been fined for failing to manage legal mass limits after an investigation uncovered 69 mass limit breaches over two years.

The National Heavy Vehicle Regulator (NHVR) Safety and Compliance Officers intercepted one of the company’s heavy vehicles in April 2021, discovering it was loaded at 120.42% of the prescribed mass limit.

Subsequent investigations revealed 69 mass limit breaches, including 24 severe risk breaches, defined as loads at 120% or more of the mass limit. The company pleaded guilty to a Category 1 offence under the Heavy Vehicle National Law (HVNL) and was fined $180,000.

The three directors also pleaded guilty to failing to exercise due diligence and ensure transport safety, receiving fines of $8,500, $7,000, and $7,000, respectively.

NHVR Acting Director of Prosecutions Elim Chan emphasised the dangers of overloaded heavy vehicles. “Heavy vehicles loaded beyond their prescribed mass limits pose serious public safety risks by compromising stability, steering, performance, and braking capability,” Ms. Chan said.

She stressed the importance of proper systems and training to ensure compliance with the HVNL and protect both drivers and the public.

The NHVR offers online tools and guides to assist with loading requirements. For resources, visit NHVR Loading Guides View the resources.

 For more information on NHVR prosecutions, visit NHVR Prosecutions.

 

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In June Australian unemployment dropped to 8.3%; lowest unemployment since September 2022

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In June Australian unemployment dropped to 8.3%; lowest unemployment since September 2022

 

In June 2024, Australian ‘real’ unemployment dropped 62,000 to 1,307,000 (down 0.4% to 8.3% of the workforce). This is the lowest rate of unemployment for nearly two years since September 2022 although overall employment is virtually unchanged above 14.3 million.

Although unemployment decreased in June as people left the workforce, under-employment increased by a similar amount in the month, up 65,000 to 1,403,000. Taken together overall unemployment and under-employment in June is virtually unchanged at 2.7 million (17.3% of the workforce).

The June Roy Morgan Unemployment estimates were obtained by surveying an Australia-wide cross section of people aged 14+. A person is classified as unemployed if they are looking for work, no matter when. The ‘real’ unemployment rate is presented as a percentage of the workforce (employed & unemployed).

  • Overall employment reaches virtually unchanged in June near record high above 14.3 million:

Australian employment was virtually unchanged at 14,307,000 (down 3,000) in June. There was a shift to more part-time employment though with 4,941,000 (up 72,000) now employed part-time while full-time employment was down 75,000 to 9,366,000. Increasing part-time employment is often associated with a rise in under-employment – which increased by 65,000 in June.

  • Unemployment decreased for a second straight month in June to its lowest for over a year:

In June 1,307,000 Australians were unemployed (8.3% of the workforce, down 0.4%), a decrease of 62,000 from May and the lowest level of unemployment for over a year since May 2023 (1,258,000). It is also the lowest rate of unemployment for nearly two years since September 2022 (8.1%).

The fall in unemployment was driven by fewer people looking for full-time work, down 131,000 to 469,000 while there was an increase in those looking for part-time work, up 69,000 to 834,000.

  • Overall unemployment and under-employment was virtually unchanged at 17.3% in June:

In addition to the unemployed, a further 1.4 million Australians (9% of the workforce) were under-employed, i.e. working part-time but looking for more work, up 65,000 from May. In total 2.7 million Australians (17.3% of the workforce) were either unemployed or under-employed in June.

  • Comparisons with a year ago show rapidly increasing workforce is driving employment growth:

The workforce in June was 15,610,000 (down 65,000 from May, but up 404,000 from a year ago) – comprised of a near record high 14,307,000 employed Australians (virtually unchanged from a month ago but up a massive 673,000 from a year ago) and 1,303,000 unemployed Australians looking for work (down 62,000 from a month ago and down 269,000 from a year ago).

 

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