When central banks face stubborn inflation, the impulse is straightforward: raise rates hard and fast. Dodge the complexity. Blunt the problem.
But the Reserve Bank of Australia has now quantified exactly what that approach would have cost Australian workers. The number is sobering: if the RBA had abandoned its focus on full employment and pursued the aggressive, inflation-focused strategy adopted by rivals overseas, unemployment would have hit 5.3 per cent in late 2025.
Instead, it has remained around 4.1 per cent. That gap represents roughly 120,000 Australians who kept their jobs.
According to RBA analysis, a more contractionary policy path would have caused unemployment to overshoot the level consistent with full employment in 2023, and the labour market would have continued to weaken through 2024 and 2025, peaking at 5.3 per cent in late 2025.
The modelling exposes a real tension in central banking doctrine. There exists a philosophy, increasingly popular among commentators who favour strict monetary discipline, that inflation control must take precedence over all other considerations. Fight inflation aggressively now, this argument goes, and the employment damage will be temporary. Tolerate it longer, and inflation becomes entrenched, requiring even harsher medicine later.
This view is not unreasonable. Inflation does genuine damage. High inflation hurts all Australians, whether paying a mortgage, renting, running a business, or just trying to make ends meet, and is especially tough on people with lower incomes and those in more vulnerable situations. The longer inflation remains elevated, the more it erodes household purchasing power and distorts investment decisions.
But the RBA's approach suggests that this trade-off is more complex than it appears. Rather than choosing between inflation or employment, the Bank pursued a middle path: bringing inflation down gradually while avoiding unnecessary labour market damage. The RBA raised the policy rate to a less restrictive level than other economies; central banks that adopted a more aggressive approach, such as the Reserve Bank of New Zealand, tended to forecast inflation returning to target more quickly while expecting a materially negative output gap, while central banks seeking to return inflation to target at a slower pace, including the RBA, tended to expect the economy to return to balance more gradually.
The results speak for themselves. New Zealand and Canada, which pursued the aggressive tightening approach, now face unemployment in the 5 to 6 per cent range. Australia's labour market, by contrast, has held firm.
This does not mean the RBA has solved the inflation problem. Underlying inflation has risen to 3.4 per cent over the year to December quarter 2025, and the pick-up in inflation over the second half of 2025 was observed across a broad range of categories, including services, retail goods and the cost of building new homes, while headline inflation increased to 3.6 per cent. There is clearly more work to do.
What the RBA's modelling illustrates is that the path to price stability need not be paved with unnecessary unemployment. The Bank has demonstrated that with careful calibration, a central bank can pursue inflation control while preserving the gains in employment that matter intensely to working Australians. It is not a perfect solution. It requires tolerance for inflation to remain above target for longer than the most aggressive approach would achieve. But it recognises an important truth: the costs of monetary policy are borne unevenly. Those who lose jobs pay a heavier price than those who endure higher prices.
For investors and policymakers watching the RBA's next moves, the message is clear. Australia's central bank remains committed to bringing inflation back to the 2 to 3 per cent target, but through a route that does not require wholesale sacrifice of employment. That pragmatism, backed by hard data, deserves recognition as a legitimate approach to a genuinely difficult problem.