Recent Employment Data Throws a Spanner in the Works for the Reserve Bank
Fresh employment data has thrown a spanner in the works for the Reserve Bank that could keep the case for an interest rate hike in the coming months alive. ABS figures released recently showed a surprise drop in unemployment, along with tightening in the labour market, all at a time of falling inflation – a trend that will send the Central Bank mixed signals.
labour Market Trends
The ABS’s latest Labour Force statistics published recently showed the unemployment rate in December dropped to 4.1 per cent, down from 4.3 per cent in November. Jobs in the economy also grew while underemployment eased – signs of a tightening in labour conditions. Experts have revealed that the stronger than expected labour market could point to a hike in interest rates as early as February.
Impact on Interest Rates
Lower unemployment was attributed to a rise in 15-24 year olds moving into jobs. The interplay between the labour market and rates remains complex, but an unemployment rate of 4.25-4.5 per cent is normally where economists expect slower inflation pressures from the jobs market. Lower than expected unemployment hints at still persistent inflation. VanEck head of investments Russel Chesler said the employment figures mean “we’re now closer to an RBA rate rise” and market expectations may change.
Expert Insights
“While it’s good news that Australians are fully employed, this is another indicator of a robust economy and inflation levels that are still too high for the RBA,” Mr Chesler said. AMP chief economist Shane Oliver told AAP a rising unemployment rate would flash a “warning sign” to the RBA to “be cautious here in raising rates”. Canstar insights director Sally Tindall said the employment data would give the Reserve Bank a lot more to think about next month.
Global Economic Environment
US President Donald Trump threatened to raise tariffs on goods from eight European countries amid tensions over Greenland, raising the spectre of a transatlantic trade war. Tensions appear to have simmered down, with Trump calling off tariffs planned for February, but the global stoush over trade just weeks before the RBA’s February interest rate meeting could motivate RBA caution. Nerida Conisbee, the chief economist at Ray White Economics, said recent global tensions may strengthen the case for a hold.
Conclusion
In conclusion, the recent employment data has added complexity to the Reserve Bank’s decision-making process. While the stronger labour market could point to a hike in interest rates, the global economic environment and falling inflation may motivate caution. The RBA will likely consider various factors, including the upcoming inflation data release, before making its decision in February. As the economy continues to evolve, it’s essential to stay informed about the potential impacts on interest rates and the broader economic landscape.
