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‘Inconsistent’ labour reading builds back-to-back rate hike risks

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By Charbel Kadib
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4 minute read

The latest unemployment figures suggest the Reserve Bank may be poised to accelerate its monetary policy tightening strategy, according to senior economists.

The latest figures from the Australian Bureau of Statistics (ABS) revealed the seasonally adjusted unemployment rate fell in May to 3.6 per cent, following a 0.2 percentage point increase in April.

The result was stronger than markets had expected, with observers anticipating just over 17,000 Australians would enter the job market, compared to the 75,900 recorded by the ABS.

According to Commonwealth Bank economist Gareth Aird, the result does not accord with broader economic indicators.

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“The monthly ABS labour force is colloquially known amongst financial market participants as the ‘labour force lottery’,” he said.

“The survey nature of the release means that on any given month, a set of numbers can print that defy logic and completely miss market expectations.

“The figures today very much fall into that category.”

He said the “inconsistent” but “unquestionably strong” May reading suggests the labour market is not weakening via the “traditional mechanism”.

Deteriorating labour market conditions, he added, are reflected in the rising underemployment rate, which increased to 6.4 per cent.

However, he said in time, the unemployment rate would also rise alongside continued weakness in GDP growth, which slowed to 0.2 per cent over the March quarter.

“In time, the unemployment rate will lift given below‑trend economic growth,” Mr Aird said.

“But it is simply just taking more time than would be expected given the slowdown in the economy.”

In the meantime, Mr Aird said the resilient labour market supports further tightening from the Reserve Bank in the coming months.

He puts the odds of a cash rate hike in July at 50 per cent.

“…Patience within the RBA Board for a more material loosening in the labour market is likely to be wearing thin given they recently ramped up their concerns around the outlook for higher wages growth and more persistent services inflation,” he said.

“Only around half of the RBA’s already- delivered 400 bps of policy tightening has hit the household sector. So, there is plenty more tightening built into the system.

“But the board might feel the policy response of least regret at this stage is to pull the rate hike trigger again in July.”

HSBC chief economist, Australia and New Zealand, Paul Bloxham, agrees, adding the labour print for May has increased risks of a faster-than-expected arrival at a higher terminal cash rate.

“Our central case sees the RBA hike to 4.35 per cent in 3Q23 (pencilled in for August) and we see a risk of a further hike to 4.60 per cent beyond this,” he observed.

“Today’s jobs figures increase the risk that the cash rate is lifted sooner, in July.”

ANZ Research’s head of Australian economics, Adam Boyton, has gone one step further, claiming the RBA may be poised to lift rates in both July and August.

“…We now see sufficient risk that the bank will need to increase rates beyond the 4.35 per cent that we had seen as the peak for this cycle,” he said.

“As a result, we also look for a hike in August. That would bring that cash rate to 4.6 per cent.”

However, economists expect the upcoming May CPI figures, due to be released on 28 June, to heavily influence the RBA’s next monetary policy move.

The Reserve Bank’s monetary policy board is scheduled to meet again on Tuesday, 4 July.

‘Inconsistent’ labour reading builds back-to-back rate hike risks

The latest unemployment figures suggest the Reserve Bank may be poised to accelerate its monetary policy tightening strategy, according to senior economists.

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