Lower unemployment rate makes a Reserve Bank interest rate cut less likely, say economists

A FALLING unemployment rate may seem to be reason for widespread celebration — but economists warn it makes an expected interest rate cut less likely.

Generic pic of a businesswoman pointing to a graph on a clear screen.

A RESERVE Bank interest rate cut in May is no longer considered a done deal after unemployment unexpectedly shrank to 6.1 per cent.

The jobless rate fell in March thanks to surprisingly strong jobs growth, smashing economists’ expectations of unemployment remaining steady at 6.3 per cent.

The total number of people with jobs rose 37,700 to 11.72 million in March, more than double the amount economists expected, with most of those gains in full-time work.

That took unemployment down to levels not seen since December 2014.

Revisions to February’s figures also contributed to the more cheery outlook on the jobs market, showing unemployment at 6.2 per cent that month, with 41,900 jobs added, the Australian Bureau of Statistics said.

That means more than 155,000 job seekers have found work over the past five months, the best result in four years for an equivalent period, CommSec economist Savanth Sebastian said.

Financial markets were seeing a rate cut in May as a 50/50 chance after the jobs news, compared to a more than 70 per cent chance earlier in the day.

Ball in their court ... the Reserve Bank of Australia. Picture: Brad Hunter

JOB FIGURES SET DOLLAR CLIMBING

The figures also had an immediate impact on the Australian dollar.

At 1700 AEST on Thursday, the local currency was trading at 77.37 US cents, up from 76.00 cents on Wednesday.

At one point the dollar was trading at 77.82 US cents, its highest level in almost three weeks.

At 1700 AEST, the Australian dollar was at 92.36 Japanese yen, up from 90.90 yen at Wednesday’s close and at 72.57 euro cents, up from 71.41 euro cents.

FXCM chief currency strategist John Kicklighter said the Australian dollar’s rally probably wouldn’t persist.

“To change the tide for the currency, the underlying fundamental themes that have driven the currency to its lows over the past weeks and months would need to genuinely shift as well,” he said.

Holding decision was justified ... CommSec economist Savanth Sebastian.

RATE CUTS LESS LIKELY: ECONOMISTS

Economists at National Australia Bank and Commonwealth Bank say the figures pour cold water on rate cut expectations.

Mr Sebastian says the figures justify the RBA’s surprise decision to keep rates on hold in April and suggest the central bank has no need to be moving rates.

NAB says it will rethink its forecast next week, after the release of March quarter inflation figures and the minutes of the RBA’s last meeting.

“It feels quite difficult at this point to build the strong case for May that normally precedes RBA rate moves,” NAB senior economist David de Garis said.

No strong case ... David de Garis, National Australia Bank Senior Economist. Picture: Mark Cranitch

Other economists, including Citi, JP Morgan and TD Securities, say it will take more than one upbeat jobs report for the RBA to put away the razor in May, due to plummeting commodity prices, weak economic growth and dwindling consumer confidence.

Mr de Garis said the non-mining economy is strengthening and generating enough jobs to stabilise unemployment, even before the full effects of the February rate cut have been felt.

Jobs growth was also good news for consumer confidence after headlines about unemployment at 12-year highs in recent months, Mr Sebastian said.

Originally published as Lower unemployment rate makes a Reserve Bank interest rate cut less likely, say economists