RBA gets breathing space

THE Reserve Bank's attempt to slow the economy is working, with the economy registering its first fall in employment levels in 18 months.

THE Reserve Bank's attempt to slow the economy is working, with the economy registering its first fall in employment levels in 18 months.

The silver lining among the looming dark clouds of higher unemployment, inflation and a slowing economy is that the pressure on the Reserve Bank of Australia to lift interest rates may be beginning to ease.

Citi economist Paul Brennan said the probability of a rate rise to 7.5 per cent later this year had slipped to about a 40 per cent chance.

However, the market is still betting for an 80 per cent chance that rates will jump higher by November, adding to the four rate rises since August.

"Market pricing for multiple official rate rises over the next 12 months ignore the clear signs the economy is transitioning to sub potential growth which should gradually take at least some pressure off inflation," Mr Brennan said.

The first fall in employment levels since October 2006 pushed the Australian dollar down to a low of US93.55 - its third consecutive day of falls.

However, Westpac senior economist Anthony Thompson said that while the data was undoubtedly weaker the labour market is not collapsing.

The Australian Bureau of Statistics jobs data for May, released yesterday, shows full-time jobs dropped 10,400 in May, while part-time employment fell 9300. This comes as climbing petrol prices drive the latest consumer inflation expectations to a record high.

The Melbourne Institute consumer expectation survey, released yesterday, rose to 5.9 per cent in June - the highest level since the survey began in 1993.

ANZ economist Riki Polygenis said the increasing inflationary pressures may negate the slowing of employment growth.

"The fall in jobs will give the RBA a little bit of breathing space but it will need to see a couple of months of data to confirm whether this is just statistical volatility or the labour market has actually turned," she said.

The ANZ is maintaining its forecast for two more rate rises this year from the 12-year high of 7.25 per cent.

"The RBA has warned that if higher inflation begins to feed into wage expectations they will need to hike further," she warned.