1300 766 075
Another Rate Cut May Be The Reality

There’s one fact that may mean an increase in official interest rates is not on the horizon. In fact, another cut may come first.

That fact is that the Reserve Bank of Australia (RBA) has not increased interest rates when unemployment has been above 5.7% in the past 15 years.

And, guess what – the jobless rate remained at a high 5.9% in April, which, coincidentally, is where it was at the height of the global financial crisis.

Added to that, annual employment growth is plodding along at under 1%, which means the unemployment rate is unlikely to improve any time soon.

So why does what’s happening in the jobs market affect the RBA’s thinking? The simple answer is that if people don’t have jobs, they have little money to spend. If people are not spending, the economy can’t grow. Consumption makes the world go around.

Confidence in the economic outlook has dropped

Confidence in the economic outlook has dropped

Source: ANZ-Roy Morgan

Increase looking unlikely

The RBA has lifted interest rates 17 times since December 2002. Of course, it has also cut rates during that time, but that’s not what interests us here.

Market economist Stephen Koukoulas says just three of the 17 rate rises occurred with unemployment at 5.6–5.7%; four at 5.3–5.5%; three at 5.0–5.2% and the other seven at 4.9% or lower.

At present, the rest of the economy is not gaining sufficient speed to tempt the bank to pull the handbrake on by increasing interest rates. Inflation is below the bottom of the RBA’s target band of between 2–3%, which it uses as the main reason to adjust official interest rates. Wages growth is at a record low and bottom-line GDP is struggling below trend.

Consumer price inflation

Consumer price inflation

Previously, the bank applied the brakes when the economy was growing strongly, inflation was building and, as Koukoulas notes, the unemployment rate was closer to 5%. There aren’t many signs the jobless rate will drop to that figure any time soon.

Hints in minutes

The RBA hinted at the importance of the unemployment number in the minutes of its April monetary policy meeting, when it held interest rates unchanged at 1.5%.

The bank said, “The board judged that holding the stance of monetary policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.” It added that developments in the labour and housing markets “warranted careful monitoring over coming months”.

JP Morgan economist Ben Jarman says it was unusual for the bank to cite particular data ‘triggers’. “The minutes note that the labour market is ‘somewhat weaker than had been expected’ ” and that “disappointment in the labour market is linked to ‘weaker than expected’ household consumption and retail spending, and similarly consumption weakness was ‘consistent with softer conditions in the labour market’,” he says.

“If an interest rate move is to be made in the near term, down is much more likely than up, so today’s shift in guidance can only feasibly be read as the RBA opening the door to a possible easing.”

It follows that we can infer that if the unemployment rate hits 6%, or goes higher, an interest rate cut will be back on the agenda.

Consequently, recent attempts to prick the ‘housing bubble’ by warning that great swathes of the population will be in dire peril if interest rates rise may have been a little premature.

Featured News