RBA signals rate rise to cool jobs market. But hot jobs are good jobs.
The RBA wants to cool the jobs market — but a tight labour market is the only leverage most workers ever get. Is that leverage worth sacrificing?
The Reserve Bank is almost certain to lift interest rates next week, and governor Michele Bullock has been unusually candid about why. The jobs market is too strong. Wages are rising. That, in the RBA's telling, is a problem that needs fixing. It is worth pausing on the strangeness of that sentence before accepting it.
The wage-price spiral is a theory, not yet a fact
Bullock's concern is "second-round effects," the phrase central bankers use when they worry that workers, seeing higher prices, will demand higher pay, which will prompt businesses to raise prices further, which will prompt further wage demands, and so on in a loop. The theoretical risk is real. The wage-price spiral is not invented. But the empirical question, the one that actually matters for policy, is whether that spiral is in fact occurring in Australia right now, or whether the RBA is raising rates to prevent something that, for the moment at least, exists mainly on a whiteboard.
The honest answer is: the evidence is thin. The most recent ABC reporting notes that there is "no evidence of a wage-price spiral," yet the RBA is acting as though one is imminent. The distance between those two positions is exactly where the policy analysis has to sit.
A tight labour market is the only leverage most workers ever get
Here is the structural problem. Inflation is most damaging to ordinary people not when wages are rising, but when wages are falling in real terms, that is, when prices are rising faster than pay. The workers who suffer most from an inflation episode are not the ones who extract a pay rise from a tight labour market. They are the ones who don't. A tight labour market is, for most workers, the only leverage they ever get. It is the mechanism through which the gains of a growing economy flow to people who work for wages rather than people who own assets. The RBA is proposing to loosen that mechanism as a precautionary measure.
A tight labour market is, for most workers, the only leverage they ever get.
That is not a neutral act. As we have explored before, rate rises land very differently depending on where you sit in the economy. Mortgage holders take the hit immediately. Workers in sectors that cool fastest, often the same people carrying those mortgages, take it in the form of hours cuts, slower hiring, or redundancies. The asset-owning class, whose wealth tends to be more durable through monetary tightening, bears considerably less of the adjustment.
Engineering unemployment is the mechanism, not a side effect
Bullock's target unemployment range of 4.5 to 5 per cent is revealing. Australia's unemployment rate has been sitting close to 4 per cent. Getting to 4.5 to 5 per cent means, in plain English, engineering a rise in unemployment. That is the mechanism. Slower wage growth does not happen because workers suddenly become more modest. It happens because workers have less bargaining power, and they have less bargaining power because more of them are competing for fewer positions.
The RBA's mandate is to keep inflation within the 2 to 3 per cent target band. That mandate does not say "cool the labour market when wages are rising." It says control inflation. The question worth asking is whether the current approach is well-targeted. Using interest rates to reduce workers' bargaining power in order to prevent an inflation outcome that has not yet materialised, while the pain of that tightening falls disproportionately on the same workers, is a roundabout way to run monetary policy.
Rate rises are a blunt tool for imported inflation
Bullock is also contending with an energy price shock that originated offshore, which is the kind of inflation that rate rises are poorly suited to fix. Raising the cost of mortgages does not reduce global energy prices. It reduces domestic demand, which eventually softens some domestic price pressures, but the transmission is slow, the collateral damage is wide, and the instrument is blunt. We have written about the gap between what the RBA watches and what actually drives its decisions, and that gap looks particularly wide when the inflation being targeted is partly imported.
Central banks have a credibility problem if they let inflation expectations drift, and Bullock is right that anchoring expectations matters. But credibility cannot be the only value in the room. A central bank that responds to the best jobs market workers have seen in decades by making it worse is not just making a technocratic call. It is making a distributional one. And that choice deserves to be named for what it is.
Workers getting pay rises, after years of wage stagnation, is not the problem. It is the outcome the economy is supposed to produce.
Sources
ABC News — Rates set to rise as RBA governor says 'heat' needs to be taken out of job market
The Bearing — Rate Rise Decision Making: Does the RBA Watch The Wrong Thing?
The Bearing — Less people are changing jobs, and that's bad
Frequently Asked Questions
Why is the RBA raising interest rates when wages are rising?
The RBA is concerned that rising wages will feed into higher prices, creating a wage-price spiral that makes inflation harder to control. The bank is acting pre-emptively, even though there is currently no evidence such a spiral is underway in Australia.
What is a wage-price spiral and is Australia actually in one?
A wage-price spiral occurs when rising prices prompt workers to demand higher wages, which in turn causes businesses to raise prices further, in a self-reinforcing loop. As of the RBA's September 2026 decision, there is no evidence this spiral is occurring in Australia — making the rate rise a precautionary rather than reactive measure.
Who gets hurt most when the RBA raises interest rates to cool the jobs market?
Mortgage holders feel the impact immediately through higher repayments, and workers in sectors that slow fastest — often the same households carrying those mortgages — face reduced hours, slower hiring, or job losses. Asset owners, whose wealth is more insulated from monetary tightening, bear considerably less of the adjustment.
Can raising interest rates fix inflation caused by energy prices?
Rate rises are poorly matched to inflation driven by offshore energy shocks, because higher mortgage costs do not reduce global energy prices. They work by suppressing domestic demand, which is a slow, blunt transmission with wide collateral damage — and it does nothing to address the source of the price pressure.
What does the RBA's unemployment target actually mean in practice?
Governor Bullock has indicated a target unemployment range of 4.5 to 5 per cent, compared to Australia's current rate of around 4 per cent. Reaching that target means deliberately engineering a rise in unemployment — reducing workers' bargaining power so that wage growth slows.