When the RBA Review panel finished its work in March 2023, the cash rate was 3.6 per cent and the Reserve Bank hadn’t quite finished its work raising Australia’s cost of living.

One of the panel’s recommendations was that “the prosperity and welfare of the Australian people” be removed as one of the RBA’s three objectives and make it an “overarching purpose” instead.

That would leave two objectives – low, stable inflation and “full employment”.

Nobody raised an eyebrow at the time because it was generally agreed that prosperity and welfare was all about inflation and unemployment, and the cost-of-living crisis of 2023-24 hadn’t got going. No big deal.

But it was a big deal; now the cash rate is 4.35 per cent, inflation is well down, employment is “full”, but the prosperity and welfare of the Australian people have disconnected from them and is in the toilet.

That is, we now have millions of working poor – families who can’t make ends meet even though they have a job and prices are no longer rising as fast as they were.

That reform is now law. The Treasury Laws Amendment (Reserve Bank Reforms) Bill 2023 enacting the RBA Review panel’s recommendations was one of the 31 bills passed in the pre-Christmas legislative frenzy that ended Parliament’s year last Thursday.

There is a new Monetary Policy Board that under the Act has two objectives instead of three:

(i) price stability in Australia; and

(ii) the maintenance of full employment in Australia

The third objective in place since 1959 – “the economic prosperity and welfare of the people of Australia” – now sits in the Act as an “overarching purpose”, whatever that might mean.

But why did the review recommend that the phrase “prosperity and welfare of the Australian people” be kicked into the long grass of “overarching purpose”? Two reasons: it’s too woolly, not measured by the ABS, and because the RBA was already ignoring it anyway.

The review’s final report said: “It is not suited to be an additional objective for monetary policy because this provides too much discretion to the RBA. Monetary policy can best contribute to this overarching purpose by focusing on full employment and price stability.”

It went on that the change would not be a “substantial departure” for the bank because “senior RBA officials have indicated … that they already consider the objectives of monetary policy in these terms.”

Having inflation and unemployment as the only objectives of monetary policy is fine in normal cycles.

In the recessions of 1982 and 1991, when rapid increases in interest rates caused unemployment to double to 11 per cent, interest rates were rapidly cut because of the “full employment” objective.

But from 2022 to 2024, the cash rate has increased 43.5-fold – the most in history – and stayed there because the unemployment rate has increased only a little, from 3.5% to 4.1%.

As a result there is no sign of the RBA cutting. In fact, some economists are telling us we should prepare for another rate hike.

Why has unemployment increased so little this time? Because of a combination of the shift in the economy from manufacturing to services, which are more labour intensive, the decline in productivity, and the huge burst of immigration since the start of 2022.

Immigration pushes up demand and prices more than the supply of labour because all migrants consume, but not all of them get a job.

It has also led to a shortage of housing because very few migrants work in construction, but all of them need somewhere to live.

Meanwhile, “full employment” doesn’t mean full employment, like the 2% average unemployment we had between 1945 and 1973, after the defining white paper “Full Employment in Australia” ordered by John Curtin and based on Keynesian principles directed government policy towards achieving actual full employment.

It said: “The policy outlined in this paper is that governments should accept the responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment.”

After the great inflation of the 1970s, and the inflation-focused central bank took control of the economy, the definition of full employment became the level of unemployment that doesn’t drive prices up, otherwise known as the NAIRU (non-accelerating inflation rate of unemployment, and the world’s clumsiest acronym).

The RBA currently thinks full employment is about 4.5 per cent unemployment, higher than the current 4.1 per cent, which Governor Michele Bullock more or less confirmed in a speech last week, saying: “at present, we judge that conditions in the labour market remain tighter than what would be consistent with low and stable inflation.”

On that subject, the Commonwealth Bank’s economist Gareth Aird published an interesting note last week suggesting that the RBA’s estimate of the NAIRU – 4.5 per cent – is too high, citing slowing wage growth as evidence.

But the RBA is a cruise ship for non-Keynesian economists, slow to turn, so as things stand, it believes unemployment needs to rise to achieve to achieve low and stable inflation, and it won’t be cutting interest rates until it does.

In any case, there is really only one objective of monetary policy, not two.

If full employment is defined in terms of inflation, as it is, then it’s a subset of the inflation objective.

Much of the argument about RBA reform has been about whether the inflation and unemployment objectives should be given equal weight, as the review recommended.

The bill that was passed last week says nothing about the relative weights of the two objectives so it’s hard to say whether the hawks or the doves won, although it was probably the doves, since the objectives are linked by the word “and”. But that’s not explicit.

Anyway, it is a specious argument, because “full employment” in RBA land is not full employment – it’s enough unemployment to keep inflation down.

So the new RBA Monetary Policy Board’s two objectives are really just one – keeping inflation down.

The prosperity and welfare of the Australian people is no longer an objective, but a purpose, to be achieved by the objective.

 Alan Kohler writes weekly for The New Daily. He also writes for Intelligent Investor, and presents finance reports on ABC News.