Reserve Bank kept rates on hold on concerns that unemployment could rise more than expected

The central bank has revealed that it kept the cash rate on hold this month on concerns that unemployment could rise more than expected.

The Reserve Bank is concerned that Australia could next year experience a sharper rise in unemployment than anticipated as the full effect of its record run of rate rises weaves through the economy.

Minutes from its meeting showed the central bank’s uneasiness about the prospects for employment across the country was a key reason in its rationale for keeping the cash rate at 4.35 per cent when it met on December 5.

The unemployment rate ticked up more than expected to an 18-month high of 3.9 per cent last month, as a bumper month of jobs growth in November was more than offset by a growing ­labour force.

The RBA in November forecast that the unemployment rate would increase to 4.25 per cent over the coming year, but this month it said there was a “possibility of a larger rise in the unemployment rate than anticipated”.

Despite more Australians likely to be out of the work in the year ahead, the RBA left the door open for further rises as it was concerned that “homegrown” factors such as trips to the dentist and hairdressers were keeping inflation higher than it would like.

“In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market,” the RBA said.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Members observed that labour market conditions were not as tight as earlier this year as labour supply had increased, and that employment growth was below the rate of growth in the working-age population over the preceding few months.

“Conversely, there was some evidence of slowing in wages growth in those parts of the labour market where conditions had eased,” the minutes say.

RBA board members noted that the shifting composition of employment growth towards part-time jobs and fewer hours being worked were signs of softer demand.

“Forward-looking indicators, such as hiring intentions reported in business surveys and information from the bank’s liaison, pointed to a further easing in the demand for labour in coming months,” it said.

Treasurer Jim Chalmers and RBA governor Michele Bullock. Picture: Aaron Francis.

Despite the consensus among analysts that rates would not increase, the RBA weighed a 25 basis point rate rise because of concern that demand in the economy was running above the level consistent with the inflation target.

For the first time, it admitted that inflation would now only return to the top of the target band of 2-3 per cent by the end of 2025, rather than the midpoint of the band it had previously expected.

RBA board members noted that domestic factors such as strong demand for services were fuelling inflation, putting the bank at odds with the government which has said international factors are the driving force. They also observed that underlying inflation was higher in Australia than in several other countries.

The Consumer Price Index indicator rose 4.9 per cent in the year to October, compared with 5.6 per cent in September. This compared with 3.1 per cent in the US and 4.6 per cent in the UK.

“Domestic demand was judged still to be running above the level consistent with the inflation target and growth could be supported in the year ahead by a recovery in real household disposable income as inflation declined,” the minutes say.

Commonwealth Bank economist Garth Aird said that the RBA was likely to continue with its inflation rhetoric for some time – and there was the possibility of a further rate rise.

“Against the backdrop of rising unemployment and falling GDP per capita the board will be quite reluctant to tighten policy further. Indeed the need for further rate rises has dissipated,” he said.

“While the near-term risk sits with another 25 basis points rate hike at the February board meeting we see the RBA on hold. We continue to expect an easing cycle commencing in September 2024.”

ANZ head of Australian economics Adam Boyton also expected no further rate hikes from the RBA despite seeing the minutes as relatively hawkish.

“We expect the RBA will retain a tightening bias over the first half of 2024 and rate cuts remain some distance off, with tax cuts (from 1 July 2024) and a likely additional discretionary fiscal easing to come first,” he said.

CBA forecasts 75 basis points of cuts in late 2024 and a further 75 basis points in the first part of 2025 which would reduce the cash rate to 2.85 per cent.

Originally published as Reserve Bank kept rates on hold on concerns that unemployment could rise more than expected