Back-to-back rate cuts scuttled as participation rate hits fresh record

Labor’s hopes of a second consecutive rate cut have been scuttled following the release of ‘incredibly strong’ labour force figures.

Following its decision to cut the cash rate, the Reserve Bank received an update on the state of the job market on Thursday. Picture: NCA NewsWire / David Crosling

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Labor’s hopes of back-to-back rate cuts have been scuttled after fresh job data revealed Australia’s participation rate hit a record high, with Reserve Bank deputy governor Andrew Hauser labelling the new figures “incredibly strong”.

Around 44,000 people found work last month, the Australian Bureau of Statistics said on Thursday, more than double expectations for an increase of 20,000, with the lift wholly driven by a rise in full-time employment.

Despite the strong reading, the unemployment rate rose to 4.1 per cent in January, up from 4 per cent in December, as the share of the working-age population in a job, or looking for one, pushed to a record high of 67.3 per cent.

Another indication of the strength of the labour market was the underemployment rate – a measure of those in work but looking for additional hours – which held steady at 6 per cent.

The ABS suggested the increase in the jobless rate could be unwound in February given a higher number of people than usual reported that they were waiting to start or return to work, classifying them as unemployed.

For the Reserve Bank, which delivered a quarter-percentage-point cash rate cut on Tuesday, the January job figures will add to its fears that the labour market may be stronger than its forecasts suggest and could rekindle price pressures.

Reacting to the figures, Mr Hauser said it was “quite hard to see bad news in the latest employment data”, adding that a key consideration for the RBA would be whether the extra jobs would spur more supply in the economy.

“There’s a very lively debate about whether employment growth leaves us with less capacity in the labour market or a bit more,” Mr Hauser told Bloomberg.
“If there is a bit more, then inflation will come down more quickly than we’re predicting, and that’d be good news.”

Australia’s tight job market has not yet resulted in outsized wage rises. Separate figures, released on Wednesday, showed pay packets grew at their slowest rate in three years during the December quarter.

Jim Chalmers lauded the new employment figures as evidence the economy was on track for a “soft landing” as Labor holds out for a second round of rate relief before the election, which must be held on or before May 17.

But Citi chief economist Josh Williamson regarded the odds of an April 1 rate cut as “minuscule”, and instead tipped a rate cut at the RBA’s following meeting, scheduled for May 20.

“Today’s strong labour force survey for January should scuttle any hopes of back-to-back rate cuts, especially after governor Bullock’s hawkish guidance in the press conference,” Mr Williamson said.

The new job report follows the release of updated RBA forecasts on Tuesday, which estimate the unemployment rate will peak at 4.2 per cent by June, holding at that level until mid-2027.

That projection, however, is below the RBA’s estimate of “full employment” – the maximum level of employment consistent with holding inflation within the RBA’s 2-3 per cent target band – at 4.5 per cent.

Speaking after cutting the cash rate to 4.1 per cent, RBA governor Michele Bullock admitted the central bank may well be overestimating the true level of full employment, but stressed it remained uncertain about the measure.

“We are continuing to test how we can keep unemployment low without adding to inflationary pressures, and so far, in good news, we’re achieving it,” Ms Bullock said.

Ryan Wells, an economist at Westpac, said the fresh job data indicated an unemployment rate in the “low 4s” may not be as inflationary as the RBA had previously been led to believe.

“While we cannot be absolutely certain, the recent flow of outcomes across the labour market, wages and inflation, in our view, suggests this might be a more likely scenario than the RBA is considering,” Mr Wells said.