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Rate cuts in 2024 more likely after jobless data surprise

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Economists believe the unemployment rate could rise more quickly than the RBA anticipates in 2024.

Economists concur that the recent speed at which the unemployment rate has risen will concern policymakers if it continues over the coming months.

The unemployment rate expanded to 4.1 per cent in January, marking the first time since January 2022 that the rate breached 4 per cent, according to the latest labour force data from the Australian Bureau of Statistics (ABS).

Earlier this month, the Reserve Bank (RBA) revised slightly its unemployment rate forecast for end-2024 from 4.2 per cent to 4.3 per cent. But given the ABS’ January data release, CBA’s Gareth Aird believes this figure is still too low.

CBA sees the unemployment rate rising to 4.5 per cent by end-2024. But it believes that RBA rate cuts will be required this year to prevent the rate rising much above that 4.5 per cent figure.

“Today’s data is consistent with our base case that sees the RBA commence an easing cycle in September,” Mr Aird said.

“We have 75 bps of cuts in our profile by end-2024 and a further 75 bps in H1 25.”

Chief economist at CreditorWatch, Anneke Thompson, said Thursday’s labour force data points to a continued slowdown in the economy.

“We expect the unemployment rate to continue to track upwards over the next six months,” Ms Thompson said.

This, she noted, could prompt the RBA to reduce the cash rate before the inflation rate gets back into the target band to protect employment levels.

Thursday’s lift in unemployment surprised economists, given many expected to see a partial reversal of the reported 62,700 decline in headcount in December.

“The economy needs to generate ~33k jobs a month to keep the unemployment rate from rising on an unchanged participation rate. At present, we are running well below those levels and the unemployment rate is on a clear upward trend,” said Mr Aird.

Also commenting on the data, HSBC’s Paul Bloxham had a slightly different view.

For Mr Bloxham, Thursday’s data is a welcome signal that the economy is “moving in the right direction for the RBA to achieve its inflation mandate over time”.

“At the same time, the unemployment rate is still historically low and below what would typically be regarded as its ‘full employment’ level. The employment to population rate is also still very high relative to history,” he said.

“We see more easing in these measures of capacity pressure as likely to be needed yet to see unit labour costs ease enough for inflation to sustainably head back to the RBA’s 2.5 per cent inflation target.”

HSBC’s central case remains that it will take some time yet for core inflation to be sustainable at the 2.5 per cent inflation target.

“Our central case is that RBA rate cuts are unlikely in 2024, with cuts likely to begin in early 2025.”

Earlier this month, the RBA maintained a hawkish stance, with governor Michele Bullock declaring “there’s more work to do”.

Ms Bullock is not fazed by market pricing, she said at the time, adding that the RBA doesn’t think of market pricing as a “forecast of our own cash rate”.

“Markets will make their own decision and they are putting their money where their mouth is on those sorts of things. But we’re not driven by market pricing. What’s important for us is looking at the economic data.”