Unemployment and Monetary Policy

The Australian unemployment rate has fallen to 5.7%. This is the lowest rate for two and a half years and so people are generally pleased.

5% remains the 'full employment' target rate, but at least things are going in the right direction. The end of the mining investment boom meant many economists feared 7% unemployment would become a reality, a level not seen in Australia for a considerable period.

Why has Australia done so well? There are a few factors we can identify.

1. Accommodating monetary policy
2. A lower exchange rate
3. A Federal Budget deficit.

The Reserve Bank of Australia (RBA) has reduced interest rates to 2%, the lowest ever, and this has helped boost consumer and investment spending, both components of Aggregate Demand, by making it cheaper to borrow while also reducing the interest on existing loans.

The exchange rate has fallen significantly since 2013, making the non-mining sector more competitive overseas, and so boosting exports.

The government, despite the desire to return the Budget to surplus, has maintained a substantial deficit, so helping maintain Aggregate Demand.

As the article below points out the lower unemployment rate and slower growth in house prices, along with low inflation, means the RBA could cut interest further to encourage a depreciation in the AU$ which has strengthened recently and threatened Australia's export competitiveness.

The Sydney Morning Herald covers the story here